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What is Private Equity?
Enjoying increasing popularity are alternative investments such as private equity, commodities, real estate, which have a low correlation to traditional investment vehicles such as publicly quoted equities, bonds and money market investments.
Private Equity is medium to long term finance, provided in return for an equity stake in potentially high growth companies that are not publicly traded either on a stock exchange or via other means.
Private Equity firms and funds are essentially investment companies that provide committed share capital to help these unquoted companies grow and succeed.
Since the start of the Industrial Revolution in the late 18th century, investors have been acquiring businesses and making minority investments in privately held companies. In the first half of the twentieth century, private equity was largely the domain of wealthy individuals and families. After World War 2, modern Private Equity was established with the advent of Venture Capital firms.
During the 1960s and 1970s, Venture Capital firms focused on starting and expanding companies, often technology companies, and this gave rise to such famous Silicon Valley successes as Apple. The Internet mania in the late 90s caused technology stocks to rocket, providing good returns to the venture capital firms.
However, in March 2000 the Internet bubble burst and post bubble, in the current economic environment, Equity firms have become more careful.
They are often looking for businesses that have proven potential for realistic growth in an expanding market, backed by a well-researched and documented business plan and an experienced management team with a good track record. This is what you should also do when investing in a private equity firm or fund.
What are its benefits?
Successful Private Equity backed companies have grown faster than other types of companies. The provision of capital, plus the experienced personal input from private equity firms or funds, sets it apart from other forms of finance. That is the benefit to the companies in whom private equity is invested.
The benefit to you as an investor is that Private Equity investments, when they succeed, can give much higher returns than public stock or bond investments and should be seen as a complementary, alternative investment. They also enjoy certain tax advantages.
Private Equity also allows you to diversify and help manage the risk profile of your portfolio. It gives you exposure to growth markets.
Finally, Private Equity provides entrepreneurs with an opportunity for long-term finance and thereby supports job creation and broad based economic development.
In Nigeria the stock market grabs a lot of the attention, but the Private Equity market is quietly growing and investors are beginning to appreciate its potential. However, capitalizing on innovative strategies and unconventional asset classes such as private equity requires significant trading skill and management aptitude. Therefore, securing lucrative partnerships with forward-thinking investment strategy advisers and asset managers is a critical success factor.
What different types of Private Equity are available?
There are basically three different types of Private Equity.
The first is Venture Capital: equity investments made typically in less mature companies, for the launch, early development or expansion of a business.
Investments can help start-up or young businesses develop their products and services in order to generate future revenues.
Later stage or Growth Venture Capital can fund the expansion of more mature businesses which are generating revenues but may not yet be profitable, or generating enough cash flow, to fund future growth.
The second type of Private Equity is Buyout and Acquisition financing: the acquisition of a significant stake or majority control in a mature company from the current shareholders.
The third type is Expansion capital: negotiated Private Equity investment in the unregistered securities of either privately or publicly held, mature companies. These companies are typically looking for capital to expand or restructure operations, enter into new markets or make an acquisition.
Is it for me?
Private Equity fund investment is for those who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. Its not for the faint-hearted but it does reward the brave and strategically intelligent.
Funds are usually locked in for five years, often for longer, and so this is not an investment for those who want liquidity in the short to medium term.
Whereas lenders have a legal right to interest on a loan or repayment of the capital, Equity is invested purely in exchange for a stake in the company and therefore returns are tied to the fortunes of the company.
However, if you want to invest in entrepreneurs, thereby being an entrepreneur yourself, this is your financial vehicle.
What tips can ARM provide?
Carefully consider the level of risk you are willing to take, the time you are prepared to leave the money invested and the size of your overall investment portfolio.
Look carefully at whether the company is in a sector that is growing; at how differentiated their products and services are from those of their competitors and how long that advantage can be maintained and the experience of the management team.
How do I start?
ARM provides opportunity to invest in Private Equity. For more information, contact your ARM Wealth Advisor who will advise on whether and how it can support your portfolio in achieving your investment goals, and the available private equity opportunities in ARM.
Last Update: June 19, 2017