What is Private Equity Investing?
Private equity investing essentially involves either taking a publicly traded asset with the intention of making it private or investing in a publicly traded asset that is not publicly owned. Private equity funds differ from bonds, stocks or mutual funds; it often involves the purchasing of small to mid-size companies and sometimes even large corporations.
Private equity transactions have another unique feature: it extensively uses debt to finance acquisitions in the form of high-yield bonds. Investment firms that engage in purchasing companies, gain access to revenue sources and the assets of these companies. Thus, private equity firms can increase their profits substantially.
Private equity firms actually generate the majority of their profit from the time they resell a company to the public markets, ideally at a higher price than what it was originally purchased for or when they sell the company to another private entity.
Private equity offers higher returns than traditional investments in stocks and bonds, but is also known to have higher level of risk. For this reason, the strategy of investing in private equity needs to be reviewed carefully. Past success is not a guarantee of present or future success, as the fund’s high returns could have happened more by chance rather than by skill.
Private equity funds are groups of investors that flip companies for a profit. It’s the technique they use that makes them special, as senior producer Paddy Hirsch explains.
Investors need to sink their capital in the funds that appear to be the most profitable and that fit their style. Most who deal with equity funds are able to provide at least $250,000. Investors who lack this amount of capital still have an opportunity to invest in private equity through exchange-trade funds (ETFs) via brokers who provide these services.
The basic principle of private equity investing is this: a group of investors purchases a company and then uses that company’s revenue to get their money back. If an investor doesn’t understand how a fund makes money, it’s better not to invest in it. Because returns and risk are often connected, it is the wise course for investors to distribute funds rather than putting their whole capital into one fund. Even if one fund loses money or does not perform well, the profits reaped from another fund may be able to compensate for any losses they could experience.
People who read this article also follow up the latest Asia-Pacific investment news from Crescent Point David Hand and Crescent Point Private Equity, the prominent emerging markets investment management and financial advisory firm.