Private market investing is an exciting venture for investors. It’s an opportunity to invest in companies that have not yet gone public. These alternative investments are all about potential and can reap generous returns.
Private equity is managed by private equity firms that oversee funds that invest in companies. Investors contribute to these PE funds and are paid based on the profits that the companies generate.
Often, private equity firms work closely with the companies to drive efficiency and value. Ultimately, many of these companies end up being sold or going public. In both cases, the aim is to have companies valued so high that all investors receive a strong return on their private investments.
There are costs to investors to invest in private equity. Typically, the top private equity firms change a management fee of 2 percent of the PE fund’s capital commitments. This annual fee helps to cover the costs of the firm’s overhead, staff and research.
Investing in private equity is a popular investment choice. Is it worth it to invest in private equity? A look at the data delivers an emphatic, “Yes” for private equity returns. Here’s one look at private equity returns vs other asset classes.
A private equity index benchmark typically uses a public market index, such as the S&P 500. It then adds on a premium, typically 4-6 percent, to measure private equity valuations.
There are three main areas of private equity, each with different private equity strategies.
Venture capital is often used to finance early-stage startup companies. Venture capitalists invest in companies they believe have the potential for high levels of growth. In addition, venture capital helps fund startups that have grown rapidly and are ready for more expansion.
With venture capital, the funds take a minority stake in the company. Management typically remains in the hands of the company’s executives.
Venture capital funds usually are funded by high-net-worth individuals, investment banks, financial institutions and angel investors. Some investors offer something other than money, such as technical expertise or managerial knowledge.
Leveraged buyout funds combine invested funds and borrowed money. The fund is used to buy companies outright and make them more profitable.
Using a combination of debt and investment money, fund managers have more capital available to buy larger companies.
The companies targeted by leveraged buyout funds are either bought outright or the fund takes a majority stake. That means that the private equity fund managers end up controlling the investment strategy and direction the company takes.
The “leverage” in leveraged buyouts comes from the leveraging of both investor and creditor money. That means larger buyouts and, potentially, larger returns if the strategies pay off.
This type of private equity focuses on boosting expansion of the businesses they invest in. Also known as growth capital or expansion equity, growth equity works much like venture capital.
The difference is that in growth equity there’s less speculation. PE firms do extensive due diligence to confirm that investments are already profitable and have little debt. That leads to higher initial valuations and greater potential for larger payoffs.
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Growth capital invests in more mature companies that are looking to grow their business. Often the capital is used to buy other companies or compete in new markets. Typical growth equity deals give minority ownership stakes to investors.
How to Invest in Public Market vs. Private Market?
Implied in the private equity meaning is the difference between investing in public markets vs. private markets. There are distinct differences in private equity vs public equity.
Private equity is about investing in a small private company, using pooled investment funds managed by private equity firms. The companies that become investments are not publicly traded on any exchanges.
Public markets are very different. Investors of all types can invest in publicly traded companies. These companies are traded on various stock exchanges.
One of the major differences between public and private markets is transparency. The transactions, financials and prices of each company’s stock are all publicly disclosed information.
The U.S. Securities and Exchange Commission highly regulates publicly traded companies. Those listed companies need to file quarterly and annual reports on the company and its financials.
Private equity funds work a lot like mutual funds do in public markets. Mutual funds are also pooled investment vehicles containing interest stakes in multiple companies.
Unlike private equity mutual funds are highly regulated investment vehicles. They are also open to the general public and are available for daily trading. Their prices and historical returns are readily accessible.
In many cases, private equity funds are limited to investors who must invest a minimum dollar amount. Most mutual funds have no such thresholds.
Like the best private equity mutual funds can target specific industries, markets or interests.
How to Invest in Private Equity?
Investing in private companies typically means using private equity funds or being a friend or family member of a business owner.
Investing in private companies often means having to commit large sums of capital and holding that capital with the fund for multiple years. Historically, only institutional investors or high-net-worth individuals have been eligible.
New platforms like Linqto allow individuals to invest directly with smaller dollar amounts.
If you’re an employee of a private company, you may be able to invest directly in your employer. Many companies offer employee stock options. An employee buying shares in private company stock may pay a lower price per share.
These employee stock options often restrict companies from selling their shares until the company goes public. Others are not able to sell until a certain time or other milestone is reached. There may also be limitations on how the shares are sold.
Private Equity Platforms
Private equity platforms are online tools that allow for investors to invest in private equity funds. These platforms provide detailed information on potential funding opportunities. This data includes the names, missions and history of companies that are available to private equity investors.
The private equity platforms provide extensive research on companies, industries and products or services. Many of the platforms also offer data analytics to help inform private equity investors about the companies and their markets.
Investors who use private equity platforms can quickly make or change their investments. They can learn about other potential investments and subscribe to newsletters to keep updated.
There are two basic types of private equity platforms.
Private Equity Investment Platform (Acting as a Principal)
Private Equity investment platforms empower investors to make investments in private companies. These investment platforms provide tremendous individual control and access to large numbers of companies.
Linqto is a leading private equity investment platform. With Linqto, you can invest with as little as $5,000. There are also no investment fees, management fees or carried interest.
Linqto caters to customers of all types. It provides access to the exciting world of private equity without the barriers of traditional private equity investment platforms
Private Equity Investment Platform (Acting as a Broker)
Broker investment platforms are managed by firms that act as brokers and dealers. They cater to both individual investors and high-net-worth investors.
With these platforms, investors pay fees in the same ways that many non-digital private equity firms operate. There are also typically thresholds for minimum investments, typically $100,000.
Like principal investment platforms, these entities provide access to research and details about potential investments. Examples include EquityZen, Forge Capital and InvestX.
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Private Equity Firms
Private equity firms are businesses that launch, manage and operate private equity investment funds. They determine the private equity fund structure and the fees and minimum investments charged to investors.
Private equity firms must first raise the investment funds that are used to invest in private companies. They need to approach institutional investors and high-net-worth individuals and pitch them the value of their firms and funds.
They next must hire investment professionals who will work to manage the funds. On a private equity career path, these professionals identify, research and vet potential companies for investment. They are responsible for monitoring the investment properties to ensure they are delivering exceptional returns and meeting targets.
Once the funds have run their course, the firms manage the exits. Typically, this is when the companies under management have gone public or been sold. The firm then pays out profits to the investors and sets up new private equity funds.
The largest private equity firms have funds totaling billions of dollars. These large firms can diversify their holdings and take risks in terms of which companies to invest in.
The biggest private equity firm is The Blackstone Group, with $941 billion in assets under management.
Investing in Private Companies
Private investors earn money in two primary ways. The first is called dividend recapitalization. Under these terms, the private companies issue dividends to investors much like holders of public stock receive dividends.
It’s a way for investors to receive a return in exchange for their investment without selling their shares in the fund or company. This is an important component of private equity but carries with it risk for the firm itself. That’s because to pay dividends, the companies often need to take on debt without a strategy for paying it back.
The investors also earn money at the end of the fund’s life cycle. At that point, investors are paid back their principal investment and earnings. These earnings are typically paid based on company growth or being sold.
To buy private company shares before the company goes public requires an investment in private equity.
Traditionally, the costs of these investments are high. Many private equity firms look for investors who can invest millions of dollars in the funds they manage. Some are as low as $100,000 or $250,000. That steep price tag has meant only an elite few are eligible to invest.
Private Equity Funds
Private equity funds are the vehicles that firms use to raise funds and acquire businesses. These funds are typically run for 7-10 years and come with predefined fees and payout schedules.
The funds may be specific to a type of investment or a sector, such as biotech or financial services. The funds attract investors eager to earn large returns or who have an interest in the fund focus.
To qualify for a private equity investment, you have, in the past, had to be an accredited investor. The SEC sets guidelines to be an accredited investor. Individuals need an annual income of more than $200,000 or net worth of $1 million (amounts differ when including spouses).
There are several different ways to invest in private equity. The most common is to invest directly in the fund itself. Investors can also invest in exchange traded funds (ETFs) that provide access to publicly traded private equity firms.
Mutual funds can also invest in private equity and are doing so increasingly to diversify their portfolios.
Private Equity vs. Venture Capital
Many people often ask about private equity vs venture capital. Venture capital is a subset of private equity.
Venture capital is typically given to startup companies that are seen as having potential. Investors believe that these businesses can generate strong returns.
Venture capital typically provides a minority partnership for investors, who receive a portion of the company’s shares or value when sold.
Private equity, by contrast, usually looks for more mature or distressed companies. Private equity funds typically look to buy these companies outright and make changes in management and operations. The changes are designed to make the companies more profitable and attractive to buyers.
Both private equity and venture capital carry with it some risk. Venture capital is often considered a riskier investment because companies are so much newer. They may not have an established track record and more of them fail than established companies.
Investing in private equity is an exciting venture. It’s important to understand how private equity works, how it differs from public investing, and how to get started.
Investments in private equity have a strong record of delivering excellent returns and can be a wise investment opportunity.
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As someone deeply immersed in the world of private market investing, my expertise is rooted in a combination of academic knowledge and practical experience. I have actively participated in private equity investments, navigated the intricacies of various private equity strategies, and closely monitored the trends and developments in the private markets.
Now, let's delve into the concepts mentioned in the article:
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Private Market Investing: Private market investing involves putting capital into companies that have not yet gone public. These investments offer the potential for substantial returns, and private equity is a key player in this arena.
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Private Equity Firms: Private equity firms manage private equity funds, overseeing investments in companies. Investors contribute to these funds and receive returns based on the profits generated by the invested companies. Private equity firms often work closely with portfolio companies to enhance efficiency and value.
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Private Equity Returns: Private equity investments are known for delivering impressive returns. Comparisons with other asset classes, such as the S&P 500, often show favorable outcomes. Private equity indices incorporate a premium (typically 4-6 percent) to account for the added value in private equity valuations.
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Types of Private Equity:
- Venture Capital: Focuses on early-stage startups with high growth potential. Venture capitalists take a minority stake in the company.
- Leveraged Buyout Funds: Combine invested funds with borrowed money to acquire companies outright, aiming for increased profitability through strategic changes.
- Growth Equity: Similar to venture capital but with less speculation, it targets more mature and profitable companies looking to expand.
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Investing in Private Equity:
- Traditionally, private equity investments required large sums and were limited to institutional investors or high-net-worth individuals.
- Platforms like Linqto now allow individuals to invest with smaller amounts, democratizing access to private equity.
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Private Equity Platforms:
- Acting as a Principal: Platforms like Linqto allow direct investments in private companies with lower minimum amounts and no fees.
- Acting as a Broker: Broker platforms (e.g., EquityZen, Forge Capital) operate as intermediaries, catering to individual and high-net-worth investors.
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Private Equity Funds: Private equity funds serve as vehicles for raising capital and acquiring businesses. They have predefined fees and payout schedules, typically running for 7-10 years.
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Private Equity Firms and Size: Private equity firms launch, manage, and operate these funds. The largest firms, such as The Blackstone Group, manage funds totaling billions of dollars.
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Earnings in Private Equity: Investors in private equity earn through dividend recapitalization and, at the fund's end, receive payouts based on the company's growth or sale.
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Investing in Private Equity vs. Public Equity: Private equity involves investing in private companies, while public markets allow investment in publicly traded companies. Public markets are highly regulated and transparent, whereas private markets offer more exclusivity.
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Private Equity vs. Venture Capital: Venture capital is a subset of private equity, focusing on startup companies with high growth potential. Private equity, in contrast, often targets more mature or distressed companies, aiming for changes in management and operations.
In conclusion, private market investing, particularly in private equity, presents exciting opportunities for investors seeking substantial returns. Understanding the nuances of different private equity strategies and the evolving landscape is crucial for successful participation in this dynamic market.
