An Understanding of Private Funds Investments For First Time Investors
Back in 2019, a staggering amount of assets were held in private equity firms, to the amount of over $3.5 trillion. If you have never heard of this concept or are interested but not sure how to go about investing in it, the information below will help you out.
First, we start by telling you what this is.
Private Equity Funds (PE)
When a company is not publicly listed or is not trading publicly, it is termed as a ‘Private Equity (PE)’. The investors that are usually interested in putting their money into spaces like these are usually of a high net worth with pension funds, as well as other private companies who have bought over public companies that were once on the stock exchange and have now been removed or delisted.
This is a direct type of investment and the majority of players have deep pockets because the idea is to take over the entities operations so they can dominate the greater part of the industries. Investors usually have a minimum amount of hundreds of thousands of dollars to use, some funds have over $250,000 entry requirement and others ask for millions. Needless to say, this is not for the small players.
The goal of investing in this type of fund is to gain a high ROI or Return on Investment which is the number used to evaluate the profitability in comparison to other investments. Click here to find out how to calculate this concept. The typical lifespan of these is between 4 to 7 years but may depend on the company itself.
Suffice to say that anyone who wants to put their money into this category will need to have a thorough understanding of the company, its assets and liabilities. They would also be aware of the risks involved. The main advantage to these is that they have minimal legal and regulatory requirements in comparison to those traded publicly.
The Reasoning Behind These Funds Being Private
Certain criteria are needed to be met to keep the status of these private. The main reason is that they are limited. The requirements limit both the type of investor as well as the number of individuals allowed to invest in them. In the US for example, the Investment Company Act of 1940 allows up to 100 investors and not more.
The numbers are specific to different ‘wealth tests’ and if you are an accredited investor, you should have a minimum of £1 million in net worth without considering any other assets you may own. However, for those who fall under the ‘qualified’ category, they need to have a minimum of £5 million and more to invest.
This type of fund may choose to stay private for a few reasons:
- The regulations are much leaner than the public funds.
- They enjoy more freedom when it comes to handling aspects such as redemptions or reporting.
- So that they can continuously use aggressive trading practices, that aren’t very popular with the public sectors, as the managers are usually precautious about this high-risk type of investing, as well as possible lawsuits.
- When it comes to public reporting, there is no stringent process for this.
- They are favorable for holding family wealth from largely wealthy families and use their members as the primary shareholders, and won’t need outside help regarding capital.
Similar to the concept of a limited partnership, these assets have a fixed term of at least 10 years, and can be extended annually. The investors or limited partners, commit to keeping their monetary investment throughout the time needed. Every 3 to 5 years, a new fund may be raised onto which the partners may put their money in or the entirety of it if they see a benefit to it.
Advantages of Using A Private Placement Such As The PE
Out of the many advantages of choosing to move your money into these, the below are the popular ones that businesses use to raise finances for their own companies:
Choosing Your Investors: When you decide to invest in private entities, you can choose who you would like to invest in the company. There may be several different companies interested, however not all will meet the requirements, so you can pick and choose. Usually, those who have similar objectives and the right amount of wealth make the mark.
It Is a Flexible Option: the type of funding you choose is flexible. It could be a combination or one single one, for instance, you could choose to go with different types of bonds, or equity capital, and you can also choose the amount from $100,000 and up. Some even ask for millions of funding from potential organizations that are interested.
The ROI: as mentioned above, this is not for small players. Those who consider it know that they will need to put their money into it and forget about it for the next 5 to 10 years. This is beneficial because the longer you keep assets in these private companies, the more you will get out. Venture capitalists who get involved in private funds investments, know this trait the best.
The only main disadvantage to this is that there may be a limited number of investors with the required capital that is needed, especially if asked to place large amounts of capital into it. However, shares and bonds can be substantially discounted at first to provide the initial mitigation and at a fraction of the whole amount, until such a time as the investing company or individual has the full capital. If you are a new business or a high-risk venture, this could be the best solution for you to raise substantial capital for your company.
A word of advice is to first do your homework and research the company in question and make sure they have a good credit rating, as well as a reputable fund manager before diving into it.