Private Equity Investing is investing into privately owned companies. A private investor can inject capital into a business that needs it. In return they will receive part-ownership in the company.
The principle is the same as investing in the stock market, however, there is much more room for growth if the company you invest in takes off. Venture Capitalists are private equity investors on a large scale. They make big investments expecting massive returns. Even on a low budget you can be a private equity investor.
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Private Equity Investing covers investments in unlisted companies at various stages of development. Private Equity Investment is often in the form of funding but may include a combination of funding and debt. The major portion of the investment return is realised when the company or business is sold or listed on a stock exchange. This sale’ date is normally determined before the capital is invested. The two main kinds of Private Equity Investing are Venture Capital and Expansion Capital.
Venture capital
Strong Venture Capital candidates are normally start-up’ companies that have innovative products that could result in outstanding growth and superior returns for investors. Start-up’ or venture capital’ investment is generally in the form of equity into the business with no security.
Expansion capital
Expansion’ or development’ capital candidates are established businesses that are capital constrained but have good growth prospects. Typically, these companies have a history of profitability but would benefit from additional finance to continue growing. Investment in companies at this stage of their growth is substantially less risky than that in start-up companies but prospects for growth are also far smaller.
Regardless of the kind of Private Equity Investing that takes place it is clear that the potential for large returns exists. A downside is also present, however, sound due diligence and understanding the company you are investing in will reduce the risk of losing your money.
How Private Equity Investing plays a part in your portfolio
Large institutional investors have always been drawn to the private equity investing. It has the potential to offer long-term returns that are superior to standard stock investing. Stock market investment cannot make the returns that Private Equity Investing can.
The Tech Boom that ended in 2001 was an example of Private Equity Investing occurring on a large scale. Venture Capitalist invested millions and received tens of millions in return for a successful floatation. This is why Private Equity Investment offers such great potential, especially is your invested company decides to become listed. You then get a share of the profit generated.
For the average investor to have private equity play a major part in their portfolio they would need to invest in a Private Equity Fund. This is good option to consider as traditionally Private Equity Investing has been the domain of the largest investors due to the size of investment required and long investment terms. Private Equity is highly illiquid and the scale needed to achieve an appropriate degree of diversification can be immense. A Private Equity Fund can offer you great diversification in a number of Private Equity investment with all the due diligence conducted for you.
Written & published by Murray Priestley, Managing Partner of Portofino Asset Management, private investment managers and publishers of the Portofino Report. http://www.portofinoasset.com/.
