Asset Management and Private Equity: Key Differences Covered

Introduction

Investors aim to build a wealth portfolio with a mix of stocks, equities, bonds, and other fixed-income securities in a diversified wealth basket.

Therefore, you must know whether to knock on the doors of an asset management firm that takes care of your investment portfolio prudently. On the other hand, if you are a business owner, a private equity firm helps you restructure your capital and run your firm profitably.

On this note, let us understand the key points of differences between asset management and private equity while diving deeper into the concepts. Helping you get started:

What is an asset management

Asset management encompasses a set of principles wherein you manage, invest, and buy financial assets prudently and diligently. Here, you may require an asset manager or get hands with an investment advisory firm that helps you understand how your financial asset management can be calibrated so that you build wealth baskets that retain their value for decades to come.

An asset management firm would help you create a diversified wealth basket comprising equities, stocks, bonds, real-estate shares, and mutual funds wherein the profits of one financial instrument offset the losses incurred by another. 

Asset managers also help you with portfolio management as in how you can invest in the right type of investments or bonds so that you can achieve your short-term, medium-term, or long-term financial goals on the whole. They can also provide you with advisory services on how you can chart out retirement planning or estate planning. 

You can also discuss tax implications with asset managers so that your investment portfolio keeps growing and not losing its value in decades to come. 

Suggested Reads- Asset Manager Vs Wealth Manager

What is a private equity firm?

A private equity firm is a company that acquires ownership of companies that are financially struggling. In other words, the ownership rights of poorly performing stakeholder companies are taken over by private equity firms to improve the capital structures of these loss-making enterprises.

This way, the private equity firm helps revamp the management expertise of loss-making units. 

The entrepreneurs of loss-making enterprises might have great business ideas. However, they lack managerial expertise and financial backup to carry on with their day-to-day business operations. The entrepreneurs give away their ownership stakes to private equity firms in lieu of financial resources and managerial expertise. 

Asset management and private equity- Key differences explained

These are the key points of differences covering asset management vs private equity. Helping you get started with a run-down on the same:

1. Investment time-frame

Investors who approach an asset management firm invest in a shorter time frame understanding the nuances of how investments and different financial portfolios work with the customized requirements they have in mind. They may deploy the services of an asset management firm for a period ranging from 6 months to one year.

On the other hand, private equity investment firms deploy a long-term association with loss-making enterprises or private companies to back up their finances or revamp their managerial excellence in running the firms better. Therefore, a private equity firm liaisons with their clients for a longer time frame covering 3-10 years or so. 

2. Clientele to cater to

A wealth management firm usually caters to large and small-scale organizations, pension planning fund companies, insurance firms, government organizations, and high-net-worth retail investors.

On the other hand, a private equity firm usually caters to business enterprises that are struggling with finances or do have have a managerial backup to run their firms diligently. Private equity involves structured investment options that are usually worked into.

3. The main area of focus

Asset management provides a focus on improving the personal finances of independent clients or stakeholders. The main area of focus encompasses building investment portfolios or wealth baskets for enterprises and wealthy individuals. Here, the asset allocation is streamlined for investors to help them broaden their investment horizon, on the whole. 

While, for a private equity firm, the main focus is to help struggling firms come up the curve and improve their managerial excellence towards running the enterprises diligently and using improved cum productive workforces. Here, the private equity firm focuses on helping its clients pick the right type of investments to help improve the company’s finances. 

4. Who makes primary investments?

An asset management company never makes investments primarily but chooses to make investments on behalf of its clients. 

Whereas, in the case of a private equity firm, the investments are primarily made by the private equity firms who have taken up the ownership stakes of enterprises that are struggling. 

5. Goal orientation

The main goal or objective of an asset management firm is to improve the appreciation of assets inside an investment portfolio. Here, the aim is to improve the value of assets a wealth basket has. Or, to improve the value of the investment portfolio, the retail investor has, on the whole

While in the case of a private equity firm, the main objective is to acquire finances from wealthy investors and help struggling enterprises evolve. The profits are shared between stakeholders within the given time frame.

6. Flexibility

An asset manager usually holds the assets of a firm or manages the assets of the individual for a limited time frame comprising 6 months to one year. The flexibility to handle investments is limited here as the asset manager only manages the fund value of the investment portfolio and makes sure the asset value or the investment value doesn’t deteriorate. 

On the contrary, a private equity firm has a better degree of control over struggling enterprises and therefore manages the assets of their clients directly. Therefore, private equity firms enjoy better flexibility in terms of deciding when they exit their investments with their clients or stakeholders. 

7. Nature of investments

The kind of investments an asset manager or an asset management firm is quite diversified. Wealth baskets or investment portfolios comprise an optimal mix of stocks, bonds, equities, mortgage funds, and so on.

On the contrary, a private equity firm focuses on making specific investment options to help the financial backup of struggling enterprises thereby allowing them to evolve. Therefore, investments made by private equity firms exercise more control over the same.

Suggested Reads- What is the difference between financial planning and investment planning?

How does an asset management company work

These are the sequence of steps that are usually performed by asset management firms on behalf of their clients. Let us have a run-down into the same:

1. To identify and evaluate assets

An asset manager primarily identifies the types of financial assets that are under an investor’s portfolio. He further analyzes what should be done with them. 

After the asset identification is done, the asset manager will evaluate the current value of these assets by having a look at their financial statements and other relevant info.

2. Asset classification and selection

Once the assets are identified and then evaluated according to their intrinsic values, comes the next step. 

The asset manager now classifies these assets according to these factors namely:

a. liquidity

b. returns on investment and

c. risks involved

The classification of these assets helps the asset manager identify strategies to help the portfolio improve or expand the horizons of the financial statuses of their clients. 

3. Assessing the risk tolerance of investors

The asset manager further moves on to understand the risk tolerance an investor is capable of carrying under his belt. This is done by performing a risk analysis on every investor who is allotted under that particular asset manager. 

This way, the asset manager identifies the type of investments that match the financial objectives of the investor and then devises a profitable investment strategy that can add value to the client’s investment portfolio. 

4. Asset maintenance

Post the asset analysis, the asset manager further moves on to monitor or evaluate the performance of assets. The asset’s depreciation rates vis-a-vis the overall value of the asset are gauged by the asset manager. This way, the asset manager analyzes the potential risks that are connected with investment portfolios on the whole.

How does a private equity firm work

Private equity firms implement various types of strategies to help poorly performing enterprises rise the mile above in terms of providing a financial backup and providing suggestive measures of improving the managerial efficiency of these firms.

They help clients with venture capital or leveraged buyouts to help them achieve their financial goals in a phased-out manner. 

They raise finances for loss-making enterprises by capturing funds from institutional investors like sovereign wealth funds, pension funds, and insurance firms, to name a few. 

Once the loss-making enterprises are revamped, then these units are resold back to the stakeholders post a couple of years. The enterprises would then generate a far better Net Asset Value or NAV than how they were faring before in public markets like stock exchange firms. 

Suggested Reads- Wealth management Vs private equity

Fee structures for an asset manager

These are the types of fee structures that are made for an asset manager as such:

1. Active investment management fees

A fund manager charges ‘active investment management fees’ to the investor for actively managing his investment portfolio.

2. Passive management fees

This is a type of fee that is applicable to any type of investment fund. Say a mutual fund or an index fund. The fee is charged as a percentage of Assets under Management or AuM. 

3. Brokerage fees

An investment broker charges brokerage fees on shares bought or sold. This can be a net percentage of final purchase or sale units of the stocks or shares that are traded within stock exchange offices on the whole. A brokerage fee can apply to various other services an investment banker provides to investors. 

What are the fee structures that are involved with private equity firms?

These are the broadly classified fee structures that private equity firms usually charge. Helping you through with a run-down into the same:

1. Performance fees

The exact proforma of the performance-based fee structure is usually outlined in the investment memorandum. The amount completely depends on how the investment works. The fee is around 5% of the profits distributed amongst investors and stakeholders. 

2. Management fees

Management fees stand in the range between 0.5% to 3% on the exact private equity fund size. This is the type of fees that usually cover a private equity firm’s operational expenses. 

The Bottom Line

Between private equity and asset management, private equity is usually preferred by enterprises whose stocks are undervalued and need restructuring. 

Asset management suits individuals or business enterprises that are keen on investing in profitable financial portfolios and fulfilling their long-term goal objectives on the whole.

Frequently Asked Questions