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Private Equity Investment

Stock market is the primary place of investment for most people. It is viewed by some as a forum where big money can be earned and thus to not invest in the stock market would be a lame thing to do. Stock market is where people can buy shares in publicly listed companies. This represents a small portion of companies you are able to invest in. Investment in unlisted companies is known as Private Equity Investing. This is an area where the investment returns may be high, though with that come huge risks.

Private equity investments are the most important funding source in the entrepreneurial marketplace. Private equity investments contribute to the funding of around 25 times the number of businesses the venture capitalists fund each year. Private equity investments are usually derived from a high net-worth individual who represents an essential source of funding for early stage, high-risk ventures.

Private equity funds invest in assets which are either are not owned publicly or which are publicly owned but the private equity investor plans to take private. Though the money used to fund these investments comes from private markets, private equity firms invest in both privately and publicly held companies. The basic principle of the private equity investment over the years has remained constant, where a group of investors buy out a company and use that company's earnings to pay themselves back. In the past 10 years, the record for the most expensive buyout has been broken and re-broken several times. Private equity firms have been acquiring companies and sometimes paying shockingly high premiums over these companies' market values. As a result, takeover targets are demanding exorbitant prices for their outstanding shares; with the massive buyouts that have made headlines around the world, companies now expect a certain premium over their current value. The numbers of high-priced deals that have occurred in recent years have led some to question whether this pace is sustainable in the long run.

Private equity investing is often divided into the categories described below. Each has its own subcategories and dynamics and whilst this is simplistic, it provides a useful basis for portfolio construction.
  • Seed
  • Start up
  • Expansion
  • Replacement Capital
  • Buyout
As a private equity investor, your money can directly go into a business that requires capital. In return, you will receive part-ownership in the company. Even modest sums of investment can give you large returns in this form of investment. As an e.g. venture capitalists are private equity investors on a massive scale. The money they ploughed into internet start-ups in early 2000s was a prime example of private equity investment.

The return made on the private equity investment is normally realized when the business is sold or listed. As long-term returns are often superior to stock investing, big money investors are very attracted to private equity investing.

If you choose to invest money in a local business that is doing really well but needs more money to expand, then this is a prime example of private equity investment. The main issue is this kind of private equity investment is illiquid and to properly diversify your portfolio you would need to make many such private equity investments to ensure you are not stuck with one bad investment.

The fundamental reason for investing in private equity is to improve the risk and reward characteristics of an investment portfolio. Investing in private equity offers the investor the opportunity to generate higher absolute returns whilst improving portfolio diversification. A good option would be to invest in a Private Equity Fund. This is a mutual fund that specifically invests in unlisted companies. In this way you get a good diversification and still be able to reap the potential rewards of a venture capitalist.

Private equity is money invested in companies that are not publicly traded on a stock exchange or invested as part of buyouts of publicly traded companies in order to make them private companies. Among the most common strategies in private equity investments include leveraged buyouts (LBO), venture capital, growth capital, distressed investments and mezzanine capital. Many times, private equity investments are short in nature.

Here are some types of private equity investments:
  • Leveraged buyouts (LBO): This is type of private equity investment is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. Most of the time, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

  • Venture Capital: This private equity investment strategy involves money being provided by investors to start-up firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for start-ups that do not have access to capital markets.

  • Growth Capital: Growth Capital refers to private equity investments, usually minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. Companies that take on this private equity investment strategy are likely to be more mature than venture capital funded companies, for instance they are able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments.

  • Mezzanine capital: Mezzanine capital is a hybrid of debt and equity financing that is is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full.
All investments carry some sort of risk. It is best to speak to a financial advisor or investment manager before you invest money in private equity investments.

Venture Giant is one such online platform that can offer you many investment opportunities. It connects active angel investors with entrepreneurs who seek investment capital and business funding to start up new ventures or expand existing businesses. So if you want to explore the attractive world of business financing, do explore the extensive inventory of business proposals waiting to be financed. Who knows you might finance revolutions like Google or Twitter.
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