Private Equity - Attractive Investment Opportunity Outside the Stock Exchange
Alternative investments such as private equity are playing an increasingly important role in the stabilization and diversification of portfolios – especially in the current environment of low interest and low yields. How does private equity work and how can private investors invest in it?
A large part of the economy is comprised of small and medium-sized companies that are not listed on the stock exchange. Through private equity, these companies can procure capital. Accordingly, private equity in Switzerland and around the world is a huge market that has to date received little attention from private investors.
Particularly in times of low interest rates and low returns on the traditional financial markets, studying alternatives is all the more worthwhile. For investors with a long-term investment horizon and risk tolerance, private equity can be a good option for alternatively investing part of the assets.
How Private Investors Can Invest in Private Equity
For a long time, private equity was reserved for institutional investors, such as pension funds or family offices. In this context, an amount of around 5 million was considered the entry barrier. Now, however, there are also private equity funds that pool together capital from investors and invest in a single company or a portfolio of several companies. This makes the minimum investment significantly lower. Another possibility is to purchase private equity fund of funds or equities from private equity companies that in turn are listed on the stock exchange.
Private investors can diversify their portfolio with investments in private equity and thus improve the risk-return ratio. However, the share of private equity should not be too high. Credit Suisse recommends a share of five percent of the total portfolio as of a certain portfolio size. In any case, the lower liquidity of this asset class should be taken into account without fail.
Private Equity – Supply Meets Demand
Private equity capital is used where there is demand. The first step is a capital commitment from the investor. Depending on the needs, the negotiated amount is invested in companies over a period of several years. In the early years, such investments hardly generate any returns; only with time can profits be distributed to the investors.
Private equity managers, in contrast with investments in listed companies, enjoy a high degree of co-determination. Often, the financial contribution of private equity companies reaches a majority interest. Hence, the financial backers can influence corporate strategy, up to and including the complete takeover of the company. For precisely this reason, private equity funds sometimes have a bad reputation as locusts. In many cases, however, companies get back on the growth track and/or improve their market position under the leadership of private equity companies.
The takeover of a company is just one of the scenarios in which private equity comes into play. As venture capital, it can also be used to finance newly created start-ups. Companies also often need capital for further growth and are therefore reliant on investors.
What Is Private Equity?
Private equity is an over-the-counter holding in a company. As a rule, the capital holding is done through private equity companies that have specialized in this form of investment. The aim is to achieve a financial return through the holding. For companies, private equity is an option for raising capital, for instance for the development of new products and technologies, the creation of new markets, planned takeovers, or also a turn-around. Over-the-counter holdings in young start-up companies with corresponding risk are referred to as venture capital.