Private equity

 Private equity consists of investors and funds that make investments directly into private companies, or conduct buyouts of public companies that result in a delisting of public equity

The Private equity assets under management surpassed $4.3 trillion in 2020.

Traditionally, PE investing has been available through limited partnerships, which can have high minimums

and other restrictions. Both accredited and institutional investors,

particularly pension funds, endowments, and insurance companies, provide funds to PE firms.

 PE firms typically try to generate returns by identifying private enterprises

as funding new technologies, introducing new products or services, expanding

working capital within an owned company, making acquisitions, strengthening balance

sheets, and restructuring. 

PE firms try to improve a company’s financial results and

prospects in hopes of allowing for a turnaround of a distressed company, reselling it

 to another firm or cashing out via initial public offerings

 Thus, PE investments often demand long holding periods.

Most PE funds are “closed-end” funds that investors commit to provide funds to pay for both investments in companies and management fees, (typically 1.5% – 2.0% of committed capital),

 the PE firm and in addition,  collect performance fees, known as carried interest, which traditionally represent 20% of any value appreciation or aggregated profits generated by the fund.

Private equity partnerships are typically self-dissolving entities that have a life span of about 10 years.

This limited life span highlights the point that the funds must seek exits of their investments to realize return for their investors. 

Liquidity risk

Substantial entry costs, with most private equity funds requiring significant initial 

investment, plus further investment for the first few years of the fund

Investments in limited partnership interests are referred to as "illiquid" investments.

Once invested, it is very difficult to gain access to money as it is locked-up in long-

term investments which can last for as long as 10-12 years.

The PE asset class is illiquid, intended to be a long-term investment

 for buy-and-hold investors

As a consequence, traditional forms of PE can be difficult to access

 for the vast majority of smaller investors.

Many of these issues can be addressed by investing in listed PE companies.

Until the late 1990s, the most common choice for institutional investors was

to pursue a balanced strategy with 60 percent equity and 40 percent fixed income allocations.

The bursting of the technology bubble in 2000 and 2001 led many investors to search

for alternative strategies.

This was most evident in the late investors in the internet companies in the very end of

the 1999 and beginning of 2000. These investors followed the exciting dot-com firms

that had been making big returns, but in the first quarter of 2000 the bubble burst.

Stock prices plummeted, leaving investors with sometimes total losses on their

investments and once heavily capitalized companies filed for bankruptcy. A way to

prevent this type of exposure is by investing with a fund that invests in a limited number

of sectors and is dedicated to improving companies within that area rather than only

investing in the popular investments.

The innovation of the endowment model was to allocate a

substantial portion of total assets in a portfolio to alternative investments, especially

Hedge Fund or Private Equity

that alternative assets have low performance correlations with public equity and fixed income 

securities allowing the managers

to control risk and provide diversification benefits

Another benefit to investing in a specialized private equity fund is that the fund will

have a wealth of industry relationships. This will be useful throughout the investment;

in the day to day operations of the company, facilitate possible mergers or acquisitions

within the industry, access to industry seasoned executives and other resources that

would not be immediately available to non specialized funds.

Overall, when selecting a private equity fund, specialization in a limited number of

industries offers a number of long term benefits. The fund's management will be more

likely to anticipate changes in the industry, have helpful contacts in the sector, have an

understanding of a portfolio company's operational needs and problems. 

-Private Equity Tends to Show the Strongest Long Term Outperformance at Times

 When Public Markets Are Flat to Down.

-Private equity can provide high returns, with the best

 private equity managers significantly outperforming the public markets.

Fund of Funds

The investment is made via shares listed on an exchange that are liquid and can be traded

The value of the holding is easily determined by the share price quoted on the Exchange

Investors avoid the need to manage “commitments” to fund future investments

The administration of a holding in a Listed Private Equity vehicle is as

 simple as any other share of a listed company, as is the tax treatment.

For the majority of PE investments, there is no listed public market; however, there is a

 maturing secondary market available for sellers of private equity assets.

Capital risk 

Given the risks associated with private equity investments, an investor 

can lose all of its investment if the fund invests in failing companies.