(Newswire.net — August 4, 2020) — Investing private equity funds in a business is a smart and savvy move for anyone with a high net worth, or with a spare chunk of money lying around. Although they’re certainly an expensive choice, and the risks can often be great, the returns can be phenomenal.
If you’re looking into joining a private equity firm to become a leading investor in the field, this should give you an insight into what to expect. Alternatively, if you’re a big spender and want to spend smartly, this explains where your money may end up. Finally, if you’re a company owner, and want to get the investment you need to boost your company’s profits, look out for the Variable Capital Company in Singapore for this, other than this you have the choices are laid out in front of you, here.
Whatever your situation, you’re here because you want to learn more about private equity funds. So, to discover what exactly this is, the benefits and drawbacks, as well as the types of private equity investment funds out there, read on…
What is a Private Equity Investment?
Private equity firms invest in businesses, small and large, which represent an opportunity for a high return. The investment, known as private equity, usually buys out the current owners, or purchases a large chunk of the business, to ensure control is in their hands. This is then cashed in on when the business is successful enough, but how does it work?
The investment firms in question receive large pools of money from buyers, who wish to make large ROIs through the use of experts in the field. These buyers are usually individuals with high net worth, as they can offer high capital over long periods of time. This capital investment, provided by private equity firms and their investors, is injected into companies to help them succeed.
This injection of cash certainly does help to ensure the business that has been invested in will succeed. However, it’s not just this money that’ll make or break the company in question, as not all businesses are made to succeed. Ultimately, the investor relations private equity also requires the skill and knowledge to understand which companies are set to make it, and which aren’t worth the time or money.
That’s not all, though, as the private equity definition requires investments into companies which are not registered on the stock exchange. This means they’re not publicly traded, hence the term “private”, meaning the investor can administer control over the company.
Generally, a private equity investment is expected to yield higher returns than the average investment, hence the appeal. For many private equity investment funds, there is a minimum investment, which is normally within the one hundred thousands mark. This means that most investments of this kind, and, therefore, most private companies, are controlled by people with deep pockets.
The Exit Strategy
Private equity funds typically come with a fixed investment period, which usually ranges between four and seven years. The investment will normally last for no more than 10 years, from start to finish.
After this time period, the investor hopes to have made a hefty profit, so they can exit the investment. These exit strategies usually include:
- Initial Public Offering (IPO): this is where the investment is offered to institutional or retail investors on the stock market, so it’s no longer private. This way, anyone can invest in it.
- Selling: the investment can also be sold to interested parties, be it another private equity firm or a strategic buyer.
Because of the view to make a hefty profit within this defined time limit, private equity investors normally pursue aggressive tactics to secure their ROI. After all, maintaining the private equity firm’s success rate is paramount to ensure their reputation remains desirable. Without this, investors are unlikely to pool their funds into the firms, which may be detrimental to the business.
Advantages and Disadvantages of Private Equity Funds
Before we go any further, it’s important that you’re clued up on what rewards and risks you may experience as a private equity investor. So, here are some of the benefits and drawbacks:
Benefits of Private Equity for the Investor
- Gives the investor the opportunity to control their investment prospects
- Returns are proven
Drawbacks of Private Equity for the Investor
- The investments required are large, so are reserved for those with a lot of cash up their sleeves
- They can be high risk
- An exit strategy is required
- They are pretty aggressive, due to the time required to achieve a high profit
Types of Private Equity
Now that we have a clearer definition on what exactly a private equity fund is, what are the different types of private equity? There are five types that we can clearly define, so let’s dive right in, so you can choose your investment strategy:
1. Venture Capital
Venture capital firms are essentially a branch of private equity firms. However, instead of investing large chunks of money with the hope of making large returns, venture capitalists usually work on a smaller scale.
Instead, they invest smaller quantities of money in small or start-ups companies that are forecasted to have a high growth potential. Some classic examples of companies that fit the bill include technology and life science companies.
When we compare private equity vs venture capital, private equity funds are normally invested in established businesses where a return is likely. Alternatively, venture capital will be invested in companies where there is opportunity to build a lot of value, usually by buying out the current owners.
2. Growth Capital
Growth capital is a version of private equity, but is basically the opposite of venture capital; investing in older, more established companies. These are lower risk investments, because the company normally has a solid customer base and, therefore, a solid profit margin.
3. Buyout/Leveraged Buyout (LBO)
As we’ve seen, not all private equity funds will buy out an entire company; they will invest in a chunk of the business, enough to administer certain control over it. However, an LBO will usually buy out the current owners, so the investors have full control over the company’s operations and turnover.
Like growth capital investments, LBOs focus their attention on mature businesses, using this investment to enhance the ROI. These sorts of investments are normally much larger than venture capitals funds, combining investor funds and borrowed money to enhance profit. Once this has succeeded, the high returns mean the investing firm can branch out and acquire larger companies.
4. Fund of Funds
This is when a private equity investor doesn’t invest in a company or asset directly, but buys into an already defined private equity fund. Managed by professional investors, these allow other investors to benefit from funds that might not otherwise be available.
5. Distressed PE
Most private equity funds will be invested into companies that are looking set for growth, but some investors may make special arrangements with a struggling company. By investing in a company in a worse-for-wear position, not only can the investor buy in cheaply. In fact, if they succeed in boosting the profits, their ROI could be significant.
Of course, this is a high-risk situation, and only for those without a faint heart. Although the risk is certainly great, the rewards could also be great too.
Invest Your Way
As you can see, there are a number of different private equity funds worth looking into. If you’re a high earner on the hunt to invest your savings in something worthwhile, this may be the path to go. Or, if you’re a struggling company looking for a pay-out, you may find that approaching a private equity investor is the choice for you.
Whatever it may be, we hope this article has provided you with a bit of insight into what to expect from investing in this way.