The Fundamentals of Private Equity
Private equity is an umbrella term that encompasses all types of funds that pool capital together from various sources, usually high net worth individuals. Private equity funds can range anywhere between a few million dollars to billions of dollars, which are used to secure large positions in a company.
Is Private Equity the Same as Venture Capital?
Technically, private equity is also synonymous to venture capital, with the exception of how they select companies to invest in. Private equity firms usually go for mature companies with proven track records who are in need of capital for major revamping, whether it's to expand to a new location or to produce a new product line. VCs, on the other hand, tend to lean towards riskier, younger companies that have a more innovative solution.
How Much Do You Need?
To join a PE fund, you'll need more money than what you usually need to open an investing account. Since the whole point of private equity is to gain influence and, sometimes, control over a company's operations, deep pockets are required. A PE fund might want to take a public company private, and in order to do so you'll need to controlling shares. The minimum required capital for aspiring PE investors will depend on the PE fund. Some will require a minimum investment of $250,000 while others will require a few million dollars in capital.
What to Consider
Aside from the minimum required capital to join a PE fund, investors who are planning to join one should consider the exit horizon for their investments. Most funds require a commitment of four to seven years as it takes time for certain investment strategies or acquisitions to pay off. As such, only invest money that you can afford to lock in for a decent period of time. Fees are another factor worth considering. The fee structure for every fund differs, but it usually comprises of a management fee and a performance fee. For instance, a fund may charge you a 2 percent management fee per year plus a performance fee of 20 percent of the gross profits that it makes for you.
The success of a private equity firm in growing your capital is also dependent on who is on the steering wheel. Thoroughly research who the fund's managers are and see if they are trustworthy before you invest your money with them.
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