Introducing Private Equity: What is all the Hype about?

Private equity is a hot topic for investors and will continue to be so for years to come. With funds under management already in the trillions, private equity (PE) firms have become attractive investment vehicles for wealthy individuals and institutions. Understanding what a PE firm exactly entails and how its value is created in such investments are the first steps in entering an asset class that is gradually becoming more accessible to individual investors. In this blog post, we will discuss what private equity is, why it should be included in your portfolio, how to invest wisely, as well as some of the risks associated with private equity investments.

What is private equity?

Private equity (PE) is ownership or interest in an entity that is not publicly listed or traded. A source of investment capital, private equity (PE) comes from high-net-worth individuals (HNWI) and firms that purchase stakes in private companies (venture capital and institutional investors) or acquire control of public companies with plans to take them private and delist them from stock exchanges.

Why invest in private equity firms?

Private equity investments are a type of investment where the investor has limited shareholder rights and little information about the company. In other words, when you invest in private equity, usually through a private equity fund or private equity investor, there is less transparency than with publicly traded stocks. This allows for higher returns because it can be riskier to provide capital to companies that are not in public markets. Investors turn to private equity to diversify their holdings and aim for higher returns than the public market might provide. And while private equity funds certainly come with higher risk, historically, they have indeed resulted in higher returns than the public markets.

Risks a private equity firm is facing?

1) Illiquidity

Private equity funds work differently than more common fund types (such as hedge funds) in that limited partners typically must commit a set amount of money that the firm can use as needed within a specified period. As a limited partner, to see a return on your private equity investment you’ll likely need to hold it in a private equity work fund for the long term, often as long as 10 years.

2) Transparency and regulation

Private equity funds aren’t registered with the Securities and Exchange Commission (unlike mutual funds), so private equity firms aren’t required to publicly disclose information about their funds. This means that investing in portfolio companies that have less transparency and regulation, the risk is higher since investors cannot clearly identify whether the financial information is accurate of the startup’s performance.

Although it can generate higher returns, It can be really difficult to keep up with the challenges of investing in a private equity firm. InvestGlass provides the means and ends to overcome the challenge of investing within the private equity industry with private equity CRM software. We offer a CRM solution ranging from marketing automation to automated decisions and investments. InvestGlass is also offered as a cloud-based solution hosted in Geneva and Lausanne.

Book a demo today and capitalize on the digitalization trend.