What One Should Know about Investing in Private Equity

2017, 19 Dec | In M & A for Entreprenuers, Merger and Acquisitions, Strategies for Growth

Investing in Private Equity – What You Need to Know

One need only to peruse the historical data associated with private equity investing to see why investors consider it to be a worthwhile venture. When juxtaposed to other investment types (Nasdaq and the S&P 500), private equity offers the best return. In some cases, like after 10 years, the return associated with private equity is nearly double of the others.

With that type of Return on Investment, one can clearly understand why the number of private equity investments (and total dollar amount invested) has increased every year, despite the 2008 crisis.

However, investing in private equity doesn’t always come easy for many investors. This investment channel has long been associated with institutions and wealthy individuals (i.e. universities, pension plans, etc.), particularly since a large number of private equity firms work only with investors who have the means and interest of committing as much as $25 million. Although, some firms have dropped their minimums to $250,000, this requirement excludes a large number of interested investors.

Types of private equity funds worth looking into

Fund of funds

A fund of funds allows investors to decrease the minimum investment required as well as the level of associated risk. However, minimal investments may remain between $100,000 to $250,000 and investors without a net worth of $1.5 million and $5 million may be excluded.

A fund of funds holds onto the shares of private partnerships investing in private equities. They have the capability of investing in hundreds of companies – across a spectrum of sectors – thus can represent greater diversification.

Private-Equity Exchange-Traded Fund (ETF)

This option does not require any minimum investment as one may buy individual shares of an ETF (which tracks an index of publicly traded companies investing in private equities) over the NYSE.

However, ETFs add additional management expenses (as do fund of funds) that one isn’t likely to incur with direct private equity investments. One might also have to pay a brokerage fee each time one buys or sells shares.

Special-Purpose Acquisition Companies (SPAC)

Another option one has is to invest in publicly traded shell companies that make private-equity investments in undervalued private company.

However, these SPACs can be a risk. They often only invest in one company, which greatly reduces diversification. Also, one may be handcuffed by investment deadlines, dictated by IPO statements, causing them to make an investment without committing the necessary due diligence.

Is it worth investing in private equities?

While one has several options for private-equity investing, each comes with its own expenses and potential risks. Compared to mutual funds, one might discover that the fees of private equity investments are high. Of course, this may have an impact on your returns.

Naturally, there are private-equity investment vehicles that have lower minimum investment requirements.  But, they often have little histories to compare to other investments, thus there is the inherent risk of the unknown.

However, if you’re considering private equity investment, one should be ready to commit  money for at least 10 years. The length of time facilitates companies to work through the acquisition phase and start becoming profitable.

Through investment between 2 to 5% of one’s investment portfolio in private equity, one can help minimize the overall risk on your portfolio and could receive a significant return in the long run.