Private equity investing involves capital investment into companies that aren’t publicly traded. You can make private equity investments directly into single firms or via funds run by professional managers. Understanding the benefits and risks of private equity investing is key to making informed decisions. Discussed below are the pros and cons of investing in private equity.
Pros of investing in private equity
Private equity investing comes with several benefits, including:
1. Portfolio diversification
Private equity investing helps you manage investment risks in various ways, including the following:
- By asset type: There are four primary types of private equity assets, each with different performance drivers, risk-return profiles, and exit strategies. You can spread your risk by investing in all or some of the types of private equity assets, including growth equity, venture capital, distressed, and buyout
- By sector: As a private equity investor, there are several sectors you can invest in, including healthcare, technology, energy, real estate, financial services, and more
You can also diversify your investment portfolio by investing strategy or geography.
2. High return potential
Investing in private equity has the potential to earn higher returns because they’re highly risky. Private equity companies always seek to identify investment opportunities with the potential for growth and offer them calculated guidance, operational expertise, and capital to help them attain their growth goals.
3. Access to distinct investment opportunities
Private equity investing gives you access to investment opportunities you cannot find in public markets. Private marketplaces such as the Hiive private stock marketplace expose investors to unique investment opportunities like real estate development projects, companies undergoing major transformations, disruptive business models, emerging technologies like artificial intelligence, and more.
4. Hands-on investing approach
As a private equity investor, you can participate in the development and growth of the firms you invest in. With this kind of involvement, projects can create exciting opportunities to make a difference, especially if you’re passionate about a specific industry.
5. Low risk
Private equity companies usually invest in firms that aren’t publicly traded, meaning they aren’t subject to similar volatility as their publicly traded counterparts. In addition, private equity companies prefer investing in organizations in their early growth stages because they aren’t as risky as mature companies.
Cons of investing in private equity
While private equity investing offers several benefits, it isn’t without any downsides. Private equity investments have the following disadvantages:
1. Private equity is illiquid
Private equity investments are illiquid, meaning once you’ve committed capital to a private equity fund, you cannot easily convert it into cash or redeem it like publicly traded company shares. The lack of liquidity is a major risk because investors cannot quickly sell or trade private equity investments.
2. Investments are susceptible to an individual company’s performance
Investors might suffer substantial losses if a company fails or struggles to achieve growth objectives. A comprehensive investigation into the particular market, management team, and competition can help mitigate this risk.
3. High entry barrier
Private equity investing requires substantial capital, making it hard for the average investor to access. Most private equity companies’ minimum investment requirements are too high, limiting participation to institutional investors and the wealthy.
4. High risk
Private equity investing is risky, including possibly losing your entire investment. The lack of regulation and transparency in private equity firms can result in unanticipated problems.
Endnote
While private equity investing allows you to diversify your portfolio and has a high return potential, it’s risky. Understanding the pros and cons of private equity investing can help determine if it’s worth the effort.
