Private equity is booming. At the end of 2022, there was more than $3 trillion in raised money that had not yet been invested.
Why is private equity booming? There are a few reasons. First, the stock market has been volatile in recent years, and some investors are looking for more stable investments. Private equity investments are typically less volatile than stocks, so they can be a good option for investors who are looking for less risk.
Key private equity investment strategies
Venture capital (VC)
Venture capital is money that is invested in new businesses that have the potential to grow very quickly. These businesses are often called startups.
Venture capitalists are people who invest in startups. They look for businesses that have a new product or service that they think will be successful. They also look for businesses that have a different business model than other businesses in the same industry.
Startups often have high debt levels because they need to borrow money to fund their growth. They also often run losses because they are investing in their future growth instead of making a profit right away.
Venture capital investing is a risky business, but it can also be very rewarding. If a startup is successful, the venture capitalists can make a lot of money.
There are three different phases of venture capital:
- Seed stage: This is the earliest stage of venture capital investing. The businesses at this stage are just starting out and need funding to develop their product or service.
- Early stage: The businesses at this stage are already operating commercially, but they are still growing quickly. Venture capitalists at this stage are looking for businesses that have the potential to become very successful.
- Late stage: The businesses at this stage are already established and have a track record of success. Venture capitalists at this stage are looking for businesses that are ready to scale up their operations.
Growth Capital
Growth capital is money that is invested in more mature companies that are looking to grow. This type of financing is sometimes referred to as “expansion capital”.
Companies that receive growth capital typically have a track record of success and are looking to expand their operations. They may use the money to expand into new markets, develop partnerships, acquire other companies, or invest in new equipment or real estate.
Growth capital investors are typically private equity firms that are looking for businesses that have the potential to grow quickly. They will want to see a detailed business plan that shows how the funds will be used to achieve the company’s growth goals.
Here are some of the things that growth capital can be used for:
- Expanding into new markets: This could involve opening new stores, expanding into new geographic areas, or launching new products or services.
- Acquisitions: This could involve buying out a competitor or a company that has complementary products or services.
- Investing in capital: This could involve buying new equipment, real estate, or other assets that will help the company grow.
Growth capital can be a great way for companies to grow their businesses. However, it is important to remember that it is a form of debt, and so the company will have to repay the money with interest. It is also important to make sure that the company has a clear plan for how the funds will be used to achieve its growth goals.
Real Estate
Real estate is another way to raise private equity capital. This asset class involves a group of investors pooling their money together to buy properties.
OR through a property bond (explained in my earlier article)
There are four different strategies that are used in real estate private equity:
- Core investments are low-risk/low-return investments. These properties generate regular cash flow, and they are a good option for investors who are looking for a stable investment.
- Core plus investments are a little bit riskier than core investments, but they also have the potential for higher returns.
- Value-added investments are medium-to-high risk/medium-to-high return investments. The manager purchases the property and engages in some form of redevelopment and sells them when the market is in an upswing.
- Opportunistic investments are high-risk/high-return investments. These properties need a lot of work, and it may take years for investors to start seeing returns.
The type of real estate investment that is right for you will depend on your risk tolerance and your investment goals. If you are looking for a stable investment with regular cash flow, then a core investment may be a good option for you. If you are looking for an investment with the potential for higher returns, then a value-added or opportunistic investment may be a better option.
Fund of Funds (FoF)
A fund-of-funds strategy in the private equity space is an investment strategy where an investor invests in a fund that invests in other private equity funds. This strategy allows investors to diversify their portfolios and reduce their risk by investing in a variety of private equity funds.
Here are some of the benefits of using a fund-of-funds strategy:
- Diversification: By investing in a fund of funds, investors can diversify their portfolios and reduce their risk. This is because the fund of funds will invest in a variety of private equity funds, which will reduce the risk that any one fund will perform poorly.
- Access to specialized funds: Some private equity funds are only available to accredited investors or institutional investors. By investing in a fund of funds, investors can gain access to these specialized funds.
However, there are also some risks associated with using a fund of funds strategy:
- Fees: Fund of funds typically charge higher fees than direct investments in private equity funds. This is because the fund of funds needs to cover its own expenses and the fees of the underlying private equity funds.
- Illiquidity: Private equity investments are illiquid, which means that they cannot be easily sold. This can be a problem if investors need to access their money quickly.
- Complexity: Fund of funds can be complex, and it can be difficult for investors to understand how they work. This can make it difficult to make informed investment decisions.
There isn’t a one size fits all approach, so each strategy would need to be analysed and due diligence performed on both the strategy and the Private Equity company considered.
Furthermore, clients who need to be accredited are often called High Net Worth or Sophisticated investors. This means that they have substantial assets and liquidity in addition to having some experience in investing.
Our definition of a High Net Worth investor is someone that has either liquid, non-property assets of around £250,000 or more, or they have an annual income of in excess of £150,000. Sophisticated investors can either be investment professionals or investors who have substantial experience of investing in investments like stocks, shares, futures or bonds.
