Private equity is a form of alternative investment. It generally encompasses purchase of stock or debt in a private company. Investors in private equity seek to generate significant returns and certain investors can actively pursuing a role in monitoring and advising companies along with operational and corporate governance improvements. These investors (typically institutional investors) hope that their involvement will serve to make the company successful so that their investment will be worth a premium price.
The private equity space (including venture capital) has grown exponentially over the past twenty years. Currently, its value is approximately $345 billion. Here are some of the features of investing in private equity.
There is a level of risk that comes with all forms of investing. Even with private equity investing, there is an additional element of risk because these assets are usually illiquid. The benefit behind this is that they are not subject to the typical volatility that is experienced in the public equity markets. Private equity can be a lower volatility asset class and has the potential to generate positive returns.
Usually, when working with a public company, the role of an investor is passive. For the most part, the fate of the investment is in the hands of the company’s management. Investing in private equity allows certain investors to take more of an active role in the company. These private equity investors, however, must be highly skilled in what they do, with years of experience, and must be a value-added compliment to the company’s existing management. These investors can step in and use their experience to attempt to optimize the company’s value. They can provide strategic expertise for the company’s management that may help the company to thrive in a competitive marketplace.
Private equity investments also provide new opportunities for investors. With about 27 million companies in the U.S., it is interesting to note that less than one percent of them are listed on public exchanges. Investors analyze public companies based on information and records available to anyone including quarterly statements and announcements about corporate strategy; because these records are available to anyone, there is more competition for these investments and fewer opportunities to find hidden gems. Since there is no market acting as a valuation mechanism, you will be able to find some start up- companies that are remarkably undervalued. The caveat is that an investor has to have the research skills, resources and risk-tolerance to become involved in this asset class.