Approfondimenti
An Introduction to Private Equity Basics
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Alternatives
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ottobre 11, 2024
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ottobre 11, 2024
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An Introduction to Private Equity Basics |
Most investors are familiar with traditional investments, which include cash and long-only positions in publicly traded stocks and bonds. Alternative investments are comprised of more complex investments and include private strategies focused on illiquid holdings. Within the private alternatives universe, asset classes include private equity, private credit, real estate and infrastructure. Among these asset classes, private equity is one of the most rapidly growing with assets under management quadrupling over the last two decades from $2.2 trillion in 2000 to $8.5 trillion as of June 2023.1
What Is Private Equity?
Private equity (PE) can be defined as equity or equity-like investments made into private companies or assets (i.e., not publicly traded or listed on a stock exchange). In general, private equity fund managers, also known as general partners (GPs), are analogous to the managers of mutual funds, with a key difference being that these general partners construct portfolios of privately held, rather than publicly traded, companies or assets. Like mutual fund managers, and unlike hedge funds, private equity fund managers acquire long-only interests in underlying companies (portfolio companies). Unlike their public-oriented counterparts, however, PE GPs typically hold each of their portfolio companies for several years.
Following such multi-year hold periods, a GP will seek to exit its stake in a company or asset at a gain relative to its entry price (or valuation) through a negotiated sale or initial public offering (IPO). A GP seeks to deliver gains across a portfolio of such companies, making PE funds largely illiquid relative to mutual funds.
What Are the Key Private Equity Strategies?
There are three main strategies within private equity—buyout, growth equity, and venture capital. All encompass actively constructing and managing portfolios composed of equity interests in privately held companies that are each individually selected in exchange for either a capital investment into a company (primary) or as a payment to an existing equity holder (secondary). The strategies’ target investments vary, however, in terms of ownership levels, portfolio company stage, and/or financing approach.
How Can Investors Access Private Equity?
Historically, private equity has been associated primarily with institutional investors and family offices that meet certain requirements for wealth, income, or financial knowledge (i.e., qualified purchasers) and that can tolerate illiquidity and a relatively long investment horizon.3 However, several recent innovations are making PE investing more widely accessible to individual investors.
Today, a number of options exist for investors to access the illiquid private equity sector.
A Closer Look at Opportunistic Multi-Manager Strategies
Opportunistic multi-manager strategies offer diversification as well as other potential benefits such as return enhancement, fee mitigation, and better capital velocity.5 Two such strategies include co-investments and secondaries.
CO-INVESTMENTS
A private equity co-investment is an investment made into a private company or asset alongside a GP who typically serves as the control and active owner of the asset. A co-investment opportunity may arise when a GP seeks to acquire a company for which the required investment capital is greater than what the GP’s fund can commit. Funds of funds can often invest in co-investments at a fee level lower than what is charged by a primary fund and sometimes offer exposure to hard-to-access private companies. Since a co-investment is made in a specific company rather than a fund, investors have greater visibility into the investment and often benefit from shorter duration.
SECONDARY TRANSACTIONS
Private equity secondary transactions are investments in which an investor is buying an existing interest or asset from another investor. Secondary transactions allow flexibility for LPs who wish to liquidate or rebalance a portfolio. Buyers of secondaries, meanwhile, may benefit from shorter duration, faster return of capital, potentially discounted access, and enhanced transparency into the underlying portfolio or assets.
What Are the Phases of Private Equity Funds?
Private equity funds typically have three phases—portfolio construction, value creation, and harvest.
What Are the Key Factors for Investors to Consider?
Private equity investing offers distinctive qualitative characteristics that differentiate the asset class. These factors include: