Invest In Private Companies Directly
BDCs still too far away from the action for you? You want direct investments in high-potential, untested private companies? Then consider investing in Special Purpose Acquisition Companies, or SPACs also referred to as Blank Check Companies.
Just be careful this type of investment has had a checkered regulatory past thus, typically issuance ebbs and flows with the strength of the overall market and economy.
SPACs are essentially investing in reverse. A management team takes a company public and then looks for an acquisition to run. If it doesnt find one that suits the teams interest, then it returns the money.
With SPACs, a small investor can invest directly in a management team that targets certain types of companies and reap all the profits, or failures, of that investment directly. Some of the big asset managers have begun getting back into the SPAC game with Avenue Capital Group, known for its distressed private equity funds, and which recently launched a SPAC to find trouble companies in any industry and turn them around in two years.
Billionaire Wilbur Ross did the same thing and raised $435 million this year for his SPAC, WL Ross Holding Corp. .
SPACs are not always easy to identify, as they are lumped in with all the other initial public offerings in the market. Especially with 2014 turning out to be a hotbed of new IPOs, identifying them is not always easy.
Young companies are always looking for cash.
What Public Companies Can Do
As private equity has gone from strength to strength, public companies have shifted their attention away from value-creation acquisitions of the sort private equity makes. They have concentrated instead on synergistic acquisitions. Conglomerates that buy unrelated businesses with potential for significant performance improvement, as ITT and Hanson did, have fallen out of fashion. As a result, private equity firms have faced few rivals for acquisitions in their sweet spot. Given the success of private equity, it is time for public companies to consider whether they might compete more directly in this space.
Conglomerates that acquire unrelated businesses with potential for significant improvement have fallen out of fashion. As a result, private equity firms have faced few rivals in their sweet spot.
We see two options. The first is to adopt the buy-to-sell model. The second is to take a more flexible approach to the ownership of businesses, in which a willingness to hold on to an acquisition for the long term is balanced by a commitment to sell as soon as corporate management feels that it can no longer add further value.
How To Start Investing In Private Equity
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.
Don’t Miss: Short Term Investments Assets Or Liabilities
The Upsides Of Private Equity
- Private equity offers the potential for substantial returns. Part of the general partner’s art is identifying promising companies to invest in, which can be grown and sold off, or taken public, for a big profit.
- For the limited partner, private equity funds are real set-it-and-forget-it investments the GP does all the work. Perfect for the passive investment crowd.
Understand The Fee Structure
Becoming a successful investor in private equity funds requires a firm understanding of the various fees involved.
Private Equity managers typically employ variations of the classic 2 and 20 fee structure inherent in alternative investments. The 2 and 20 means a 2% management fee on the funds total capital due each year. And another payment of 20% on the returns generated .
As competition for capital increases in the space, variations of this fee structure are becoming increasingly evident. Other fees to be aware of include:
- Management fees
Recommended Reading: Socially Conscious Investing Mutual Funds
How Can Smaller Investors Obtain Access To Private Equity Investment
Private equity investors may not be able to make withdrawals for several years.
Private equity can produce some of the highest returns in the financial markets. Historically, private equity performance exceeds that in the broader stock market by as much as 3 percent annually, according to a 2012 National Bureau of Economic Research report. It’s not surprising that small investors might want to gain access to this kind of above-average profit. While private equity is typically reserved for larger investors, the average investor can still participate, either directly or indirectly.
Identify The Type Of Private Equity Strategy
At its most basic level, private equity represents a strategy in which a company acquires control of a functioning business. The economys performance, the performance of the industry in which the business operates, and the strength of the businesss underlying growth determine success.
The risks include an economic downturn, the instability of excess debt, or the intrinsic business risks in the company.
However, private equity also has distinct areas of emphasis that expose investors to slightly different risk-and-return profiles than those mentioned above. These types of private equity investments include:
Venture capital and private equity funds both acquire ownership in private businesses. However, venture capital invests in early-stage companies that have not yet reached maturity.
Additionally, their stake may not be significant enough to exert control over management. Instead, venture firms typically own in the range of 10% of the business and can advise managers.
As a result, the return profile may be significantly better than private equity if an early-stage firm achieves significant growth. But, the likelihood of failure may be greater too.
Debt is less of a feature here since early-stage firms have less leverage due to their less-stable cash flows or use of hard assets. Venture capital is distinct from private equity in terms of risks and returns to the point of being considered a different asset class.
You May Like: How Do I Invest In Nike Stock
Where To Find Venture Capitalists
The first step to find venture capital is to make a smart introduction to the venture capital firm the founder is interested in meeting. Venture capitalists rely heavily on trusted connections to vet deals.
Founders shouldnât try to contact as many people as possible they should try to find venture capital firms that are the best possible fit for their deal.
The more closely aligned the founder is with the needs of the venture firm, the more likely theyâll find venture capital firms willing to write them a check.
Founders should do extensive research both online and through existing networks ahead of time in order to determine what types of investments a firm makes, as well as whether or not they have any connections with that firm.
Every pitch to a venture capital firm starts with an introduction to someone at the firm. It helps to know the exact profile of a venture capitalist to know which level of introduction makes sense.
Typically itâs starts with an introduction to an associate and then founders can work their way up to the full partnership.
Why Blackrock For Private Equity
Private Equity is an essential element of investors portfolios. Investors are seeking differentiated strategies for their Private Equity allocations based on their unique needs, including risk and return objectives, cash flow profiles and overall cost. Our platform takes a holistic approach to investors Private Equity portfolios and is designed to offer strategies and solutions that align with client objectives and deliver persistent outperformance.
You May Like: How Much Money To Invest In Cryptocurrency
Taking Advantage Of Full Control
Today, private equity firms are turning to more creative methods that some argue are more healthy or sustainable.
For example, by holding 100% of a firms equity and sitting on its board of directors, private equity managers can control critical business decisions. These decisions include accelerating a companys growth pace, either internally or by the use of capital.
If a private equity firm has strong expertise in the business industry and a network of experienced partners, it can take on self-help projects to improve operations. These include simplifying a companys cost structure, reducing complexities, or exploring undiscovered markets or white spaces.
Private equity firms can also utilize capital to grow. Often, they can help a company get financing from the financial sector, private lenders, or follow-on investments from their committed funds. With capital, PE funds can build new facilities or expand to new geographies.
Special Purpose Acquisition Companies
You can also invest in publicly traded shell companies that make private-equity investments in undervalued private companies, but they can be risky. The problem is that the SPAC might only invest in one company, which won’t provide much diversification. They may also be under pressure to meet an investment deadline, as outlined in their IPO statement. This could make them take on an investment without doing their due diligence.
A recent development in private equity is the use of crowdfunding to raise capital, especially for new ventures, from individual investors, each contributing a relatively small amount. Today, there are several platforms offering a range of investment opportunitiesbut note that these investments can be highly risky. Also. be sure that if you participate in equity crowdfunding, make sure you do so as an investor, and not as a donor .
Recommended Reading: How Can A Small Private Firm Finance Its Capital Investments
Which Strategy Is Best
The answer to this question is the same as many in business: it depends.
As with anything, the success of any investment strategy is contingent upon an excess of external factors such as the economy and social or technological trends.
Comparing VC and PE firms, both have the potential to generate substantial profits.
âHowever, PE firms are capable of paying out more than venture capital firms largely due to factors like bigger fund sizes.
Many large buyouts may not be as lucrative since debt with a high yield does not come cheap, but middle market buyouts remain attractive even now.
Overall, there is a greater amount of opportunities for seeing growth in emerging markets than in developed markets.
The availability of greater profits nationwide has fuelled the growth behind PE firms.
Types Of Private Equity Funds
Private equity funds generally fall into two categories: Venture Capital and Buyout or Leveraged Buyout.
1. Venture Capital
Venture capitalVenture CapitalVenture capital is a form of financing that provides funds to early stage, emerging companies with high growth potential, in exchange for equity or an ownership stake. Venture capitalists take the risk of investing in startup companies, with the hope that they will earn significant returns when the companies become a success. funds are pools of capital that typically invest in small, early stage and emerging businesses that are expected to have high growth potential but have limited access to other forms of capital. From the point of view of small start-ups with ambitious value propositions and innovations, VC funds are an essential source to raise capital as they lack access to large amounts of debt. From the point of view of an investor, although venture capital funds carry risks from investing in unconfirmed emerging businesses, they can generate extraordinary returns.
2. Buyout or Leveraged Buyout
Contrary to VC funds, leveraged buyout funds invest in more mature businesses, usually taking a controlling interest. LBOLeveraged Buyout A leveraged buyout is a transaction where a business is acquired using debt as the main source of consideration. funds use extensive amounts of leverage to enhance the rate of return. Buyout finds tend to be significantly larger in size than VC funds.
You May Like: Ishares Broad Usd Investment Grade Corporate Bond
Private Equity Vs Venture Capital: An Overview
Private equity is sometimes confused with venture capital because both refer to firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings . However, there are significant differences in the way firms involved in the two types of funding conduct business.
Private equity and venture capital invest in different types and sizes of companies, commit different amounts of money, and claim different percentages of equity in the companies in which they invest.
Who Should Consider Private Equity Investing
Private equity funds are out of reach for many investors because they tend to have substantial minimum contribution requirements.
How substantial? Let’s put it this way: Some private equity funds will allow you to buy in for as little as $250,000. Others have capital contribution requirements that reach up into the millions.
Many private equity funds are only available to institutional and accredited investors, who are thought to be more experienced and thus able to take on the risk of investing in securities not regulated by the SEC. An accredited investor is one with a net worth exceeding $1 million who’s earned an income above $200,000 or $300,000 if filing jointly for the past two years.
You May Like: Banks That Do Heloc On Investment Property
Choose The Investment Structure: Independent Sponsors Versus Committed Funds
Two types of investment structures common in the private equity industry are: independent sponsors and committed funds.
Independent sponsors generally do not have committed funds and, instead, have networked relationships with investors. These firms initially identify investment opportunities and then seek financing to fund their purchases on a deal-by-deal basis.
Investors benefit because they retain discretion and freedom to choose which investments to make. They also avoid the investment timing uncertainty of when capital calls are made. Finally, the fee arrangements for these investments could be friendlier than committed funds.
Investors in these funds have ceded choice over acquisition targets to the private equity managers. As a result, when the PE manager issues a capital call, investors must finance their commitments, regardless of their views of the merits of a particular deal.
These funds are also known as commingled vehicles because it includes an investors capital with other investors in the same pool. The advantage of this structure is that it is more hands-off for the investor. Once they have built confidence in the private equity fund, they can spend less time completing their due diligence on each deal.
Differences Between Investing In Private Equity And Public Stocks
- Private equity firms buy controlling stakes in the businesses they invest in, often paying a premium to acquire this control.
- A controlling stake enables owners and managers to have closer alignment, which may not exist in publicly traded companies.
- The management itself often selects the board of directors in a publicly-traded company, leading to poor oversight.
- PE firms do not have to report quarterly financial results to the public. Less frequent reporting allows companies to have a longer-term focus when making decisions.
- Private equity investments aggressively use leverage because the risk tolerance of the investor base is high. On the other hand, publicly traded companies operate with less debt, as investors are typically more averse to risk.
- Investments held in PE-backed businesses are more illiquid than publicly traded stocks, which are exchangeable for cash during market hours. By comparison, the liquidity for a private entity only happens when the entire business is sold, with a typical 5-year holding period.
Now that weve learned why its worth investing in private equity lets dive into the areas private equity funds can excel in, creating superior value and differentiating themselves.
Don’t Miss: Why Investing In Gold Is A Bad Idea
Its Time For Institutional Investors To Embrace The S In Esg
Institutional investors were late to realize the alpha potential of clean tech and other environmental investments. They should avoid making the same mistake with social impact.
A decade ago, few institutional investors believed that their environmental, social, and governance funds could generate meaningful alphaat least not in comparison with other classes of funds. But that mindset has changed. According to BCG research, institutional investors increasingly recognize that impact investing is not simply a philanthropic vehicle, but one that can produce attractive returns. A major catalyst for that shift has been climate change.
With up to 20% of gross domestic product globally at risk from carbon emissions, the E in ESG has gone from an abstract notion to a concrete business challengewith specific solutions that financiers can fund. In the past couple of years, commercial private equity firms have entered the green space at scale, with ten times as many funds launching in 2018 as in 2000. In addition, numerous boutique firms have sprouted up, focusing exclusively on clean tech, alternative energy, and climate change. This funding-fueled innovation has delivered impressive returns, with the first generation of clean energy and clean-tech superstars already rivaling Big Tech leaders in total shareholder returns.
Viewing Small Funds Through A Big
One key reason for the relatively low level of institutional investor funding is that many pension funds, insurers, and sovereign wealth funds apply the same conventions about ticket size and track record to social impact funding as they do to their large-scale portfolio investments. But social impact is a very different space. Deal sizes are necessarily smaller, the data on outcomes is less mature, and accurately gauging the benefits of addressing factors such as financial inclusion, poverty alleviation, and affordable housing may require examining second- and third-order effects that can also financially benefit the invested companies. By attempting to conform small-fund dynamics to big-fund hurdles, institutional investors deny communities and themselves the impact and yields they might otherwise generate.
Thats a huge missed opportunity. Attracting more institutional capital could allow social impact funds to significantly extend their reach and increase economic inclusion. In return, pension funds, insurance companies, and sovereign wealth funds could gain access to high-quality investment opportunities in growth markets, enabled by the differentiated deal access and expertise that equity-focused impact fund managers can provide. BCGs research has found a strong correlation between gender and racial equity and business performance, with leaders seeing higher rates of revenue growth, stronger innovation, and greater employee and customer satisfaction.
Recommended Reading: Do I Have To Be 18 To Invest In Stocks