Private Equity/Alternative Investments
What Is Private Equity?
Private Equity is capital – specifically, shares representing ownership of or an interest in an entity – that is not publicly listed or traded. It is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies with the intention to take them private.
Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies.
Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods.
Private equity firms raise money from institutional investors and accredited investors to invest in different types of assets. The most popular types of private equity funding are listed below.
- Distressed funding: Also known as vulture financing, money in this type of funding is invested in troubled companies with underperforming business units or assets. The intention is to turn them around by making necessary changes to their management or operations or make a sale of their assets for a profit.
- Leveraged Buyouts: This is the most popular form of private equity funding and involves buying out a company completely with the intention of improving its business and financial health and reselling it for a profit to an interested party or conducting an IPO.
- Real Estate Private Equity: Typical areas where funds are deployed are commercial real estate and real estate investment trusts (REIT). Real estate funds require higher minimum capital for investment as compared to other funding categories in private equity. Investor funds are also locked away for several years at a time in this type of funding. According to research firm Prequin, real estate funds in private equity are expected to clock in a 50 percent growth by 2023 to reach a market size of $1.2 trillion.
- Fund of funds: As the name denotes, this type of funding primarily focuses on investing in other funds, primarily mutual funds and hedge funds. They offer a backdoor entry to investor who cannot afford minimum capital requirements in such funds. But critics of such funds point to their higher management fees (because they are rolled up from multiple funds) and the fact that unfettered diversification may not always result in an optimal strategy to multiply returns.
- Venture Capital: Venture capital funding is a form of private equity, in which investors, also known as angels, provide capital to entrepreneurs.