Once again, we delve deeper into the world of alternative investments. This large class of investments has many unique characteristics that can further diversify your portfolio and provide the sought-after alpha potential. We’ve explored REITs and Structured notes in previous articles. If you’d like to read about those products, here are direct links to take you there:
REIT – Real Estate Investment Trusts (whitakerwealth.com)
Alternative investments – Structured notes (whitakerwealth.com)
In this post, we’ll explore the private equity capital market.
The potential is great
Private equity investments involve aggregating capital from investors to acquire equity ownership in private companies. Fun fact: more than 85% of companies valued at and above $250M are NOT publicly traded. This means that public market investors only have access to 15% of the whole market; there is a great opportunity out there! Private equity investments are typically made by private equity firms, which manage funds from institutional investors, high-net-worth individuals, and sometimes retail investors.
Let’s take a look at it in more detail
Private equity investments can include startups, mid-sized firms, or large private companies looking to expand, restructure, or go private from public markets. Usually, these companies are looking to raise capital for expansion, growth (M&A), innovation, and, in some cases, to navigate distress situations.
This is why finding a manager or financial advisor who knows what companies are being invested in and why is essential. Our team at Whitaker-Myers Wealth Managers conducts the necessary research and due diligence so you, as the investor, do not need to. Having the right guardrails and boundaries can be a significant game changer in the private market.
Private equity investors often take an active role in managing the companies they invest in. This can include strategic guidance, operational improvements, financial restructuring, and other forms of hands-on management to increase the company's value. With this type of support and due diligence (when selecting the right company to invest with), private equity investments have often outperformed the S&P 500.
Pros of Private Equity Investments
Potential for higher returns
With access to a wide range of investments and active management by the investing organizations.
Diversification benefits
Since these assets are poorly correlated to the public markets, they can provide an opportunity to increase diversification and additional alpha. To understand correlation better, here is an article to help - Correlation of Assets in Your Portfolio (whitakerwealth.com)
Aggregation of funds
Allows for investment opportunities for those who are typically unable to.
Cons to Private Equity Investments
Increased risk
Investing in startups or small/mid-cap businesses has inherent risks; compared to investing in the S&P500 index, it has increased risk.
May have high minimum requirements
Including net worth, investment capital, and income.
Illiquidity or semi-liquidity
Some funds may have redemption limitations and have minimum investment time horizons. Some may apply a ‘haircut’ on the investment if taken out before (usually around 2%).
Fees
Including some frontend, backend, and management fees.
Transparency
This is becoming less of a concern as most information is available on the investment company’s website and their fact sheets.
Complexity
Investing in private equity isn’t as easy as the public market and certainly has a learning and investing curve.
How do I know if Private Equities are for me?
The best answer here is to discuss it with your financial advisor. Our team at Whitaker-Myers Wealth Managers is always ready to field your questions and guide you with the heart of a teacher.
Private equity investments play a crucial role in the financial ecosystem by providing capital and expertise to private companies and fostering innovation, growth, and economic development. While they offer the potential for high returns, they come with significant risks and require a long-term commitment. As mentioned earlier, there certainly is an opportunity with private equity investing, but discuss it with your advisor to see if it is a good fit for you.
Alternative Investments – Private Equity
May 28, 2024
Summit Puri
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