Introduction
Not many newbie investors know what private equity is all about. Trading with stocks, buying bonds, or investments via mutual funds are the commonly used routes for investing.
However, investing via private equity seems a road less traveled. Highly seasoned investors who have been successfully redeeming investment portfolios and have higher degrees of risk tolerance usually go in for this type of investment.
Let us touch down on the basic conceptual understanding of what private equity is all about. Then, the blog topic- ‘Can Retail Investors Invest in Private Equity?’ shall be addressed in a more detailed note. Helping you get started further:
What is meant by Private Equity- Meaning and Conceptualization Explained
Private Equity or PE is the concept of buying shares or stocks from companies that are not listed on stock exchange markets. Investors make investments in non-disclosed private firms through the following methods:
- Buyouts
- Venture Capital
- Growth Equity and
- Distressed Assets
These are funding methods by which investors gain a major portion of the company’s ownership.
What are the different types of Private Equity Investments?
We have four different types of Private equity Investment portfolios. Let us have a brief rundown of each of the above:
A- Buyouts
Investors indulge in buyouts of equity shares or ownership shares from private entities. This way, they get an added ownership over running the firm.
For instance, if an investor owns 62% and above the buyout shares in a private company, he can also manage the state of the affairs of the firm. He can be elected as one of the board members of the top management. This process is known as management quota.
When the buyout is primarily financed by debt, it is known as a leveraged buyout. Likewise, you find different types of buyouts that the investor can engage with.
B- Venture Capital
Venture Capital, also known as VC, is a type of private equity investment wherein investors buy shares from early-stage startups or from enterprises that are in their pivotal stages of development. Here, the investor has a higher growth potential to diversify his investment portfolio.
C- Growth Equity
Growth Equity is a type of Private equity investment wherein investors invest in fast-growing companies that are privately owned and managed. These are not listed on public stock exchanges or are funded by public sector undertakings. Private investors or retail investors buy shares from fast-moving companies in order to fuel their expansion or improve their portfolios.
D- Distressed Assets
Distressed Assets refer to financial instruments that are issued by firms while they are on their verge of bankruptcy. Investors buy shares, bonds, and mortgage deeds to prevent these firms from going insolvent. Private Equity firms also purchase shares from loss-making units to help them revive and build their lineage in their domains.
How Can Investors Get A Better Exposure on Private Equity Platforms?
These are platforms by which investors get better exposure to private equity platforms. Helping you through with a rundown of the same:
A- Private Equity ETFs or Actively Trading PE Firms
You can look for Private Equity platforms that issue PE ETFs amongst retail investors. You can sign up with PE trading platforms like:
- Black Stone or BX
- KKR
- Carlyle Group and
- Apollo
You can get in touch with firms that deal with issuing private equity shares to investors instead of contacting these companies directly.
B- Retail-focused PE platforms
These are self-driven PE platforms wherein you have the software set up by PE owners, and you can invest the requisite capital for the same to buy or sell private equity shares that can diversify your investment platforms.
- Moonfare: Minimum Investments start at US$10,000, and the upper limits can go up to US$50,000. These are accredited PE shares that you can buy and sell.
- Fund Rise- You can buy and sell real estate investments. The starting capital is $10,000 and upwards.
- Yield Street- You can look for alternative investments like PE, litigation, finance, etc. The minimum start-up investment ranges from the upper limits of $10,000.
- iCapital- The minimum startup capital is US$ 100,000 and above. You only deal with specialized types of accredited PE shares.
C- Venture Capital Via Equity Crowdfunding
You have platforms that allow you to make specialized investments in private equity. Here, you help startups raise seed capital for their business entities. These platforms are:
- SeedInvest
- Republic
- WeFunder
These are platforms that are based out of the US. You can contact neighborhoods inside your domain so that you can buy and sell accredited private equity shares in the country that you reside in.
What are the pros for retail investors in private equity?
These are the main pros for retail investors in private equity. The list follows:
A- High return potential
When you invest in growing companies or invest your seed capital in newly developed startups or small-scale firms, you grow exponentially. This is because the company grows and distributes its capital profits and other reimbursements to you as an investor.
B- Diversification
These are not regularly traded instruments like publicly traded stock exchange equity shares, bonds, or commodities. However, you get to diversify your investment portfolios when you acquire shares, bonds, or debentures from private equity firms.
When newly acquired companies get into mergers or acquisitions, then you can hit winning strokes in terms of receiving bonus shares or premium stocks from the PE firms as such.
C- Access to innovation
You can witness first-time mergers, acquisitions, or business expansion drives through the private firms where you have invested. Therefore, you get a more dynamic exposure to how companies work or operate. In a nutshell, you can fairly conclude that private equity investments are posh and innovative investing options you can probably get hands-on with.
What are the cons of private equity investments?
These are the cons that pertain to PE investments. Let us have a run-down on the same:
A- Being illiquid
PE shares cannot be bought and sold like regular equities, shares, or commodities. You have seasoned platforms and firms that offer them to retail investors. Posh and experienced investors usually opt for private equity investments.
B- Higher risks and lower transparency
PE shares come to you with higher risk factors. For instance, if a new startup has failed and you have heavily invested in this company, then your investments turn to penniless.
At the same time, the managerial expertise and efficiency of newly started firms are not disclosed to you as like regularly traded stock firms disclose in the form of P&L accounts, balance sheets, and so on. The level of transparency with private firms is therefore on the lower edge.
C- Complex to learn or understand
PE investments are not straightforward investment options like stocks or bonds. The complexity here in terms of analysis on how investments work is on the higher edge indeed.
You need a certain degree of understanding of how higher management works, how M&A (Mergers and Acquisitions) deals are carried out inside firms, and have a fair overview of how the top industry leaders work to be able to delve into private equity or venture capital initiatives.
The Bottom Line
You must approach a private equity firm or have a word with an investment advisor before venturing into private equity investments. Doing online research would help you learn and understand how PE works on the whole. What are your thoughts on this? Do mention it in the comments below!
