Private equity

Updated: 2006-10-19 09:07

Considerations relative to other forms of investment include:
  • Substantial entry costs, with most private equity funds requiring significant initial investment (usually upwards of US$100,000) plus further investment for the first few years of the fund called a 'drawdown'.
  • Investments in limited partnership interests (which is the dominant legal form of private equity investments) are referred to as "illiquid" investments which should earn a premium over traditional securities, such as stocks and bonds. Once invested, it is very difficult to gain access to your money as it is locked-up in long-term investments which can last for as long as twelve years. Distributions are made only as investments are converted to cash; limited partners typically have no right to demand that sales be made.
  • If the private equity firm can't find good investment opportunities, they may end up returning some of your capital back to you. Given the risks associated with private equity investments, you can lose all your money if the private-equity fund invests in failing companies. The risk of loss of capital is typically higher in venture capital funds, which back young companies in the earliest phases of their development, and lower in mezzanine capital funds, which provide interim investments to companies which have already proven their viability but have yet to raise money from public markets.
  • Consistent with the risks outlined above, private equity can provide high returns, with the best private equity managers significantly outperforming the public markets.

For the abovementioned reasons, private equity 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. This is balanced by the potential benefits of annual returns which range up to 30 percent for successful funds.

Most private equity funds are offered only to institutional investors and individiuals of substiantial net worth. This is often required by the law as well, since private equity funds are generally less regulated than ordinary mutual funds. For example in the US, most funds require potential investors to qualify as accredited investors, which requires US$1 million of net worth (exclusive of primary residence), US$200,000 of individual income, or US$300,000 of joint income (with spouse) for one documented year and an expectation that such income level will continue.


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