The very term private equity continues to capture a lot of attention and admiration from many companies and in the financial marketplace as well. But unfortunately, not a lot of people are don’t have any idea about private equity and how the industry actually works. It has the highest returns of the investments with a key role in getting the higher total portfolio returns. The combination of strategic and operational objectives and innovative factors are the reasons why the market returns are so compelling and impressive. But to get these returns one need to do some good investments in resources and relationships plus patience and endurance are required as well.
The market for private equity has grown since 1978 with lots of unregistered securities and public organizations. The investments occur via limited partnerships which are handled by a partner and massively funded by the limited partners. The categories of private equity are buyout funds, distressed securities funds, mezzanine funds and venture capital funds. A successful private equity investment can bring exceptional market returns with improved portfolio diversification. Besides offering potentially extraordinary returns, private equity has many stipulations as well. But the unique nature of the return distributions, the industry can understate the potential of the nature of private equity. But then, even after all these, the regulations can make it tough to realize the returns in a timely manner. It offers minimal diversification advantages. The returns appear to have low connections with the public equity markets with low connections largely reflecting the estimated returns which cannot be perceived. In addition to that, there are conventional risks in private equity which includes unknown investment horizon, high bankruptcy rate amongst the portfolio companies and liquidity constraints.
There are several investment strategies for private equity and the most common strategies are venture capital and buyouts investments. Private equity is a lot like non-tradable investment in equity and equity-like securities. This differs from the public equity in many ways inducing pricing, governance, alignment of interest, liquidity, performance management, and control. The most commonly known difference is liquidity. The other important differentiator is the control over the investment. The private equity professional would have a higher degree of control over any portfolio company than a public equity investor. The private equity professional tends to have the control of the board directors of the company either alone or in collaboration with the other investors.
The private equity fund manager has the ability to acquire the assets away from an auction process, influence the strategic direction of a company, enhance the operations of the company and lastly drive the highest price at exit. Generally, private equity is added in portfolios for its ability to add value to public equity investments. A well-managed private equity program can bring you a perfect premium to the public equity returns with an appropriate amount of risk. There are obviously some less attractive features of private equity but that can be largely managed based upon the private equity professional and strategy selection.