Thinking of some alternative ways of investing your assets? You should consider the option of investing your funds into privately-held businesses. As a matter of fact, the private equity market size has multiplied by three times in the last ten years from $2 trillion in 2010 to more than $6 trillion in 2021, and it is still gaining momentum. Such a tendency made it a highly prospective stream of investment.
Let’s figure out what types of private equity investments exist, equity investment examples, private equity markets, and why private equity is a good idea to facilitate your process of making the decision.
Private Equity Fundamentals
Let’s start with the basics and figure out what exactly we call private equity (PE).
- Private equity is investing in non-publicly-traded companies, intending to improve their performance or privatize them (take from the public into the private sector).
Usually, private equity firms get their capital from investors, which can imply pension funds and wealthy individuals, and operate that money to buy stakes in other private companies. They may work to improve the company’s processes, like reducing the cost of production and increasing profitability (to sell their stake for a profit).
Private Equity Specialties
Certain private equity firms and private equity funds specialize in a particular type of private equity transaction. While venture capital is frequently categorized as a subset of private equity, its distinct function and skill set distinguish it, giving rise to separate venture capital firms that dominate their industry. There are also some other areas:
- Distressed investing
- Growth equity
- Sector specialists
- Secondary buyouts
- Carve-outs
So keep those in mind if you think to invest private company.
Private Equity Deal Types
There exist three main types of private equity investment: venture capital, growth equity, and buyouts. Let’s take a look at all three of them.
- Venture capital.
It is a type of private equity investment made in the early stages of startups. During that time, venture capitalists provided seed funding in exchange for a stake in the company. This type of investment can be risky, which is why most startups cannot provide proof of future success at the time you invest. However, if it performs well, it has the potential to provide investors with mind-blowing numbers.
- Growth equity.
This is a type of private equity in which capital is invested in an already existing, fully operational company. In such cases, investment is made in exchange for a minority stake in the company. Growth equity investors can analyze financial history, check clients’ market perspectives, and test products before making a decision, which reduces the risk of losing money.
- The buyout.
A private equity company or the existing administration team makes this private equity investment by purchasing a developed business. While the previous investors exit, the new investors gain control of the company. Buyouts are a good option for companies that need to make internal changes or make acquisitions without losing a lot of money from their private capital.
How Are Private Equity Funds Managed?
Let us explain how private equity funds are managed. It is usually done by a group of experts who are accountable for growth capital. These people are often called general partners. They have impressive experience in investing in private equity markets and know how to operate private investment funds. Also, these profs have the following responsibilities:
- Sourcing investment opportunities
- Performing due diligence on potential deals
- Negotiating the terms of the deal
- Setting up the portfolio
- Come up with a plan to maximize returns
General partners also have a signed fiduciary duty. According to it, those people have to act in their best interests and make investment decisions in private equity markets.
What Is the History of Private Equity Investments?
Long story short, private equity has been around for centuries. The first private equity fund actions date back to the 1600s, when wealthy individuals invested in firms to earn a portion of their revenue. The current private equity sector formed in the mid-twentieth century, with the establishment of the first institutional private equity firms in the 1940s and 1950s.
Wonder how to start a private equity investment? White Sails is here to assist you on your way. Our specialists have tons of experience in investing and will help you to get things done properly. So do not hesitate and contact us now!
