Private equity is an alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private (get them delisted from public markets).
Private equity investments usually come from institutional investors or accredited investors (different countries have different rules around accredited investors but nearly high net worth individuals). Still, some private equity funds do trade on public markets.
Investors in private equity funds are called Limited Partners (LPs), while the managers of these funds are called General Partners (GPs).
How can I invest in private equity funds?
- You can invest in so-called "fund of funds", which are investment vehicles that hold the shares of partnerships that invest in private equity funds. Fund of funds typically invests in hundreds of private companies that represent many different phases of venture capital and industry sectors, allowing for greater diversification and offering less risk compared to a single private equity investment. However, to participate in a fund of fund investment, you need to commit a minimum sum of $100,000 to $250,000 and have a net worth between $1.5 million to $5 million (at least in the U.S.).
- You can invest in exchange-traded funds (ETF) that tracks an index of publicly traded private equity companies. Some examples include the Invesco Global Listed Private Equity Portfolio (NYSE Arca: PSP), ProShares Global Listed Private Equity ETF (BATS Trading: PEX) and ETRACS Wells Fargo MLP Ex-Energy ETN (NYSE Arca: FMLP). However, this is not quite the same thing as investing in private equity funds that these private equity companies manage: the returns from the funds they manage go to their GPs and LPs, not necessarily to PE firm shareholders.
- You can invest in publicly traded special purpose acquisition companies (SPAC), which are shell companies that make private-equity investments in undervalued private companies. Although this process is less costly and more suitable for retail investors, it may present a higher risk as it does not offer much diversification by investing in one company. Many SPACs also lack a track record and are essentially "blank cheques" for their managers.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies