Investing in private equity: what are the benefits and risks?
Investments
Posted by MoneyController on 28.08.2024
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What kind of investment is private equity? How do these alternative investments work and why is it reserved almost exclusively for professionals?
A company or business can raise finance in many ways. They can, for example, list themselves on the financial markets and sell shares. Or they can issue bonds. But if they do not want to or cannot list themselves on the so-called ‘public’ financial markets, they can resort to borrowing or financing in the form of private capital: in the latter case, this is ‘private equity’, a form of investment typically the exclusive domain of professional operators.
This form of investment seems to be growing steadily: as we read on the ‘Funds People’ platform, the private equity experts at Arcano Partners (a company engaged in financial advisory and management) noted an average market growth of 10% from 2015 to 2021.
Private equity is a popular form of investment for its diversification function, as these assets are often decoupled from public financial markets. Private equity can lead to high returns, but also to large losses (even the loss of all investments in the event of company bankruptcy). These investments are not open to everyone: on the one hand, there is the inherent riskiness of unlisted and, therefore, illiquid investments; on the other hand, there is the lack of transparency: the lack of public listing makes professional valuation and management indispensable.
Investments in private equity can be made by purchasing shares either in the company or in a fund that invests in this field. Investors may, however, be required to meet a certain capital requirement. In addition - as we go on to read in Funds People - these funds have contractual commitments (typically lasting several years) that make the invested capital illiquid for investors, or they have large penalties for redeeming shares. This is in addition to the numerous risks of private equity, making these investments unsuitable for retail investors (subject to the possibility, as we also read on ‘Funds People’, to discuss them carefully with your financial advisor).
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