Introduction To Private Equity: Advantages And Disadvantages
Private equity offers a range of advantages for private companies and startups. It gives them an alternative source of liquidity instead of traditional financial mechanisms, including public listing or bank loans with high interest rates.
Particular forms of private equity venture capital could finance companies at the very early stages, often considered the seed stage. In the case of unlisted companies, private equity helps them to adopt innovative growth strategies without the pressure of quarterly earnings inherent to the traditional public market scheme.
Still, there are also some difficulties related to private equity investments. Unlike with public markets, there are no buyers and sellers available in order to make private holdings liquid. Prices for shares are determined in the course of negotiations between buyers and sellers and not as a result of market forces. Moreover, the shareholders rights in private equity are also decided during negotiations, and not regulated by an established framework of public markets.
University Of California To Invest $4 Billion In Private Equity Giant Blackstone
As students attending the University of California system return to classes from their winter break, they are being met with news that the university administration has made a $4 billion investment in the real estate arm of the financial giant Blackstone Inc., the Blackstone Real Estate Income Trust .
Over the course of the last several months of 2022, 48,000 academic workers across the UC system carried out a strike impacting all ten campuses that shut down the university. The workers walked out because they wanted substantial wage increases, and in particular a cost-of-living adjustment to counteract rampant inflation and the high cost of living in the state. They were betrayed, however, by the United Auto Workers union that formally represents them. UAW bargainers eviscerated the demands of the membership, dropping all discussion of COLA from negotiations, and lowering wage proposals by over $10,000.
Emboldened by the fecklessness and outright collaboration by the UAW bureaucracy with management, the university administration has wasted no time in deepening its attacks on the academic workers. The decision to spend $4 billion of public money to invest in BREIT will serve to divert vital resources from education and thus further immiserate the workers and students in the UC system.
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Reasons To Invest In Private Equity
Why should you consider investing in private equity? Lets point out some noteworthy factors.
- Returns in private equity depend on absolutely different factors than in public equity markets, which makes private equity investments a great diversification instrument,
- Instead of focusing on quarterly earnings as we usually do in public markets, private equity ownership provides the possibility to focus on long-term performance results. Eventually, it may help to generate larger returns.
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Expanding Retail Access To Private Markets
3 min read
As alternative managers increasingly look to retail investors for growth opportunities, its essential to consider the unique administrative, liquidity and technology requirements of the retail marketand the optimal distribution route to such an important market. This is the key take-away of a discussion at the recent ALFI Roadshow in New York where Cyril Schopfer, Head of Client Coverage for the US at RBC Investor & Treasury Services, provided his perspectives on the democratization of private assets trend.
We’re seeing a mini-revolution in the retail space,” says Schopfer. Most of the larger alternative asset managers are actively looking at this market.”
Increasing focus on the retail market is confirmed by industry surveys. A poll conducted by PERE indicates that 53% of alternative fund managers expect retail investors to account for a larger proportion of their assets under management over the next five years,1 while an EY and SEI survey shows that 73% of managers believe non-accredited investors should be able to invest in private markets.2
Private Equity Investing Five Questions Answered
Should you consider private equity? How do you access private markets if you want to, and what are the biggest risks? Our experts explain the basics.
We caught up with Tim Boole, Head of Product Management Private Equity, and David Bajada, Investment Director at Schroders Capital, to find out what investors can expect from private assets.
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Potential Benefits Of Investing In Private Equity
- Greater returns. Private equity historically is a higher performer, with higher returns than returns in publicly traded stocks.
- Company building.Venture capital , a type of private equity investment, can help early stage tech startups launch, build, and grow. Examples include Google, Space Xâs Starlink, Twitter, and WhatsApp.
- Supports growth. Similarly, growth equity, a type of private equity that invests greater amounts of capital, allows midsize companies to expand and grow faster.
Diversify Your Portfolio With Private Equity
Diversification through top-tier private market funds can yield superior risk-adjusted returns. That’s how pension funds and endowments continue to outperform traditional stock and bond portfolios.Now, itâs your turn.
The potential expected returns of adding a PE component to a portfolio of stocks and bonds depicted above are for illustrative purposes only. This graphical representation is based on a subjective industry analysis, and certain assumptions that have material consequences for the analysis. Under different assumptions the performance would be different.
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A Short History Of Private Equity
Private equity came to prominence during the ’80s, specifically utilizing leveraged buyouts . During this period, companies would acquire a business, often in a hostile takeover, by issuing massive amounts of debt and pledging the target businesss assets as collateral. After the takeover was complete, the target business would often be saddled with a significant debt burden. In order to generate as much profit as possible, many of these companies would then look to aggressively cut costs and sell pieces of the business that they had just acquired.
Through these often hostile acquisitions, the LBO gained a negative reputation as did the companies that pursued them. Most saw those companies as predatory actors looking to siphon a healthy business cash to enrich themselves.
The LBO bonanza was reigned in eventually as investment banks and law firms figured out effective ways of countering these takeover attempts. From the ashes of this once aggressive and immoral practice arose a new generation of private equity funds, which worked with their target company to increase shareholder value and, by extension, the value of their PE funds.
Today, the private equity industry has matured and ballooned in size. By the end of 2019, global assets under management in the private equity space was estimated at $4.5 trillion and private equity managers were referred to as masters of the universe.
As Institutional Investment In Private Equity Slows Wealthy Investors Step In
Pension funds, insurers, and foundations have long looked to private markets to boost returns, but wealthy individuals are moving more assets into these sectors as fund managers make it easier for them to invest.
This shift is happening at a good time for private-equity funds as institutional investors hold back on funneling more capital into the sector, partly because of continuing economic uncertainty and rising rates, and partly because they are already fully invested. A big reason for their hesitance is the poor performance of public stocks and bonds in institutional portfolios last year allowed private equity holdings to grow as a percentage of overall assets.
These factors, combined with volatile markets and a cloudy outlook, led to a nearly 42% drop in new investments to global private-equity funds through the third quarter last year from 2021, according to Preqin, a London-based data and analysis firm focused on private markets. The firm expects another 2.6% drop this year.
Private wealth investors, therefore, present an opportunity for private-equity firms to raise financing at the same time more private investorsgiven poor returns and shrinking opportunities in public marketsare looking for alternatives.
Generally, there is quite strong appetite across the spectrum from retail, private wealth, and family offices, says Cameron Joyce, Preqins deputy head of research insights.
The Case for Investing
A More Accessible Option
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A Massive Global Opportunity Set
There are multiple reasons why institutional investors and high-net-worth individuals have taken to private equity, and why it may be of interest to retail investors.
Firstly, theres the sheer size of the industry and hence a great breadth of investment opportunity.
According to a McKinsey & Company study, total assets under management in the global PE industry hit a whopping US$9.8 trillion in June 2021.1Adding private equity to the investment mix introduces another source of diversification to portfolios that would otherwise be dominated by share market and traditional bond market investments.
Us Equity Outlook: Patiently Waiting For A Durable Bottom
The roster of visitors at Blackstones midtown Manhattan headquarters is fast changing. Executives from deep-pocketed institutions like a California public employees pension fund or an oil-and-gasrich emirates sovereign wealth fund continue to show up, ready to pour billions of dollars into Blackstone businesses, often as limited partners.
But far more numerous in recent years are less affluent financial advisers from places like Kansas, Oregon, and South Carolina, where they service clients trying to balance house payments and college tuitions for their kids.
In its four-decade history, private equity has undergone three stages. There were the barbarian corporate buyouts of the 1980s. Then came the boom in alternatives, funded by large institutions and ultra-high-net-worth investors. And starting now is the retail revolution.
Led by Blackstone, alternative-asset managers are assaulting the last and richest bastion of fundraising: relatively plain folks with $1 million to $5 million in investable assets.
It is not only financial products being tailored to this humbler clientele, but sales methods as well.
Whereas meetings with pension and sovereign wealth fund managers are carried out face-to-face, alt firms must reach out to the many more thousands of retail investors through webinars and other virtual gatherings. Squads of retail specialists then follow up with visits to clients around the globe.
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The Strategic Secret Of Private Equity
The huge sums that private equity firms make on their investments evoke admiration and envy. Typically, these returns are attributed to the firms aggressive use of debt, concentration on cash flow and margins, freedom from public company regulations, and hefty incentives for operating managers. But the fundamental reason for private equitys success is the strategy of buying to sellone rarely employed by public companies, which, in pursuit of synergies, usually buy to keep.
The chief advantage of buying to sell is simple but often overlooked, explain Barber and Goold, directors of the Ashridge Strategic Management Centre. Private equitys sweet spot is acquisitions that have been undermanaged or undervalued, where theres a onetime opportunity to increase a businesss value. Once that gain has been realized, private equity firms sell for a maximum return. A corporate acquirer, in contrast, will dilute its return by hanging on to the business after the growth in value tapers off.
Public companies that compete in this space can offer investors better returns than private equity firms do. Corporations have two options: to copy private equitys model, as investment companies Wendel and Eurazeo have done with dramatic success, or to take a flexible approach, holding businesses for as long as they can add value as owners. The latter would give companies an advantage over funds, which must liquidate within a preset timepotentially leaving money on the table.
How To Invest In Private Equity As A Retail Investor
1. Introduction:
Retail is the process of selling goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of a large number of individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clients. Shopping generally refers to the act of buying products. Sometimes this is done to obtain final goods, including necessities such as food and clothing sometimes it takes place as a recreational activity. Recreational shopping often involves window shopping and browsing and does not always result in a purchase.
2. What is private equity and how can retail investors get involved?
Private equity is a type of investment that is not publicly traded on a stock exchange. Private equity is typically used to finance the growth or acquisition of companies. Retail investors can get involved in private equity through investment funds, such as venture capital or private equity funds.
3. The benefits of investing in private equity.
4. The risks associated with private equity investing.
5. How to get started in private equity investing as a retail investor.
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Ways To Invest In Private Equity
SpaceX and Instacart are just a few of the incredible private companies in America. Many are poised to generate incredible profits for their shareholders.
The only problem is that you normally cant buy into these types of companies unless you are an accredited investor. More on that later, but an accredited investor is basically a millionaire or someone who has a high income .
So what can the rest of us do to get a piece of the private equity pie? Well cover 3 strategies in detail on how you can do exactly that. But first, a quick intro to private equity.
This post may contain affiliate links. If you click on a link and complete a transaction, I may make a small commission at no extra cost to you.
The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Key Parties In Private Equity Investment
Before beginning the investment process, its important to understand the three parties in any private equity investment and the roles they play:
Individual investorsalso called retail investorsare people with capital to invest. These individuals provide money to private equity firms in hopes that theyll see a return on their investment. Once a firm has invested their capital, these individuals can be referred to as limited partners. In addition to high-net-worth individuals, pension funds and institutional investors can act as limited partners. As a limited partner, youre protected from the possibility of losing more money than your original investment.
Private equity firmsalso called general partnerspool limited partners’ money and make strategic decisions about how to invest it. There are three key types of private equity strategies:
Investors contribute capital firms pool, allocate, and manage the capital and companies use the capital to hopefully generate returns. After a specified amount of time, returns are paid out to the firms managers and split among limited partners based on how much money they originally contributed.
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Administrative Requirements Merit Special Attention
Dealing with a multitude of individual investors can be frustrating for alternative managers. Big alternative asset managers are set up to handle a small number of large clients,” Schopfer says. It can be a challenge to handle the number of retail investors. All the different reports and forms that need to be read and filled out can be an issue for managers.”
Dealing with a multitude of individual investors can be frustrating for alternative managers
According to Schopfer, its important for alternative managers to think about the frequency and transparency of reporting, which tends to be more onerous in the retail space. And depending on the structure or where the funds are being distributed, the authorities may require a specific set of data and documents that are unique to the retail sector.
Giving Companies Time To Execute Business Strategies
A feature of private equity is that it gives managers of PE-owned companies the time and space to implement business plans without constantly having to look over their shoulders, which is what happens in companies listed on share markets.
The quarterly reporting cycle that listed companies are subject to means that executives are constantly under pressure to manage for short-term results. Just one disappointing quarterly result can send a listed companys share price tumbling.
Contrast that with what happens in private equity where company managers and employees are incentivised to deliver operational and financial improvements over multi-year time scales. Rome wasnt built in a day and private equity recognises this.
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How Retail Investors Could Invest In Private Equity
Historically, private equity has been difficult to access and as result unappealing to retail investors. Claire Smith, Alternatives Director – Private Assets, shares how private equity is now closer to retail investors than people think.
18/10/2021
Historically, private equity has been difficult to access and as result unappealing to retail investors. Claire Smith, Alternatives Director – Private Assets, shares how private equity is now closer to retail investors than people think.
18/10/2021
Other Ways To Invest In Private Equity Funds
If there are other avenues out there for investing in top private equity funds which we didnt talk about today, wed love to hear about them. We say top private equity funds for a reason because those are the fund managers we want to entrust our money with. So, whoever provides us with access to a top fund should charge a reasonable fee for the privilege. None of this 2 and 20 stuff. Half a percentage point seems like a fair price considering theyll probably need to front the money to invest in the fund first, then divvy up access to retail investors.
Nothing fancy will come at that price and were okay with that. We dont expect to have liquidity because thats just added costs, nor do we expect there to be much selection. A couple funds from several of the top-ten private equity firms out there will do just fine. Since we expect youll be using the term blockchain to raise the money for your venture, well assume youve properly securitized the whole thing, and minimums can start at $10,000 so that us commoners can dip our toes in the water. If that sounds like you, please drop us a note as we have plenty of investors both accredited and non-accredited that would be interested.
Update 11/08/2021 A reader alerted us to a firm called Aqua, an investment platform that allows individuals to invest in private equity at lower minimums. Well look to cover them once their platform starts offering investment products.
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