Private equity is an alternative investment category that acquires or invests in private companies that aren’t publicly traded or listed on the public stock exchange. Understanding private equity before investing is key to making informed investment choices. Discussed below is everything you need to know about private equity.
1. How private equity works
When it comes to private equity, private equity companies raise money from individual and institutional investors. Private equity firms commonly use leveraged buyouts to generate returns. In leveraged buyouts, these companies will obtain controlling stakes in a company or complete ownership using a combination of equity and debt.
The private equity firm then looks for ways to improve the company’s financial profile and operations so they can sell it later for a profit. Private equity companies also invest in firms via growth capital investments, which are minority stakes in organizations that are seeking to enter new markets, expand their operations, and make acquisitions.
2. Types of private equity
The following are the different types of private equity you can invest in:
- Venture capital: They’re a type of private equity that funds new businesses and early-stage startups. As a venture capitalist, you’ll invest in companies you trust have high growth potential. If you’re looking to invest in venture capital, you can trade in a reliable private marketplace, such as the Hiive private equity marketplace
- Leveraged buyout: This kind of private equity buys firms and makes them profitable. They combine investors’ money with borrowed funds to raise more capital to purchase larger companies
- Growth equity: Also known as expansion equity or growth capital, this form of private equity puts money in mature companies seeking to expand their businesses by purchasing other companies or entering new markets
3. How to invest in private equity
There are various ways to invest in private equity, including the following:
- Direct investments: This is where investors invest in private equity funds directly. Nevertheless, the minimum amount required for investment is usually very high, making it hard to get into private equity
- Private equity exchange-traded funds (ETFs): Private equity ETFs enable you to invest in private equity by purchasing ETF shares that track how publicly traded organizations involved in private equity perform, providing diversification opportunities and potential returns
- Funds of funds: They’re a pool of capital from several investors for investing in a diverse private equity funds portfolio. This gives exposure to various private equity investments while minimizing risk
- SPACs (special purpose acquisition companies): You can invest in SPACs, which refer to publicly traded shell firms that do private equity investing in undervalued private companies. Nonetheless, SPAC investing can be risky and might lack diversification.
4. Benefits of investing in private equity
- Potential for higher returns: While private equity investing is risky, it can be quite lucrative. You can generate higher returns as a private equity investor than those in publicly traded markets
- Diversification: Private equity investing allows you to diversify your portfolio by asset, investment strategy, sector, and geography, helping manage investment risk
- Long-term investment strategy: Private equity investments are held for many years, providing a long-term investing approach. This allows private equity firms to pursue growth opportunities without the short-term pressure associated with publicly traded companies
Endnote
While private equity can be profitable, understanding this type of investment can help you make wise choices. Familiarize yourself with everything you need to know about private equity, including how it works, how to invest, the benefits of investing, and more.