What to Consider before Investing in Private Equity

Before investing in private equity it's important that you understand what private equity is and how it works. There are generally three ways that private equity firms earn a return on their investments: (1) through capitalization, (2) through an IPO, or (3) when a company they control merges with another company or is sold. Investors of a company can buy unlisted securities or the security can be sold to a private equity fund. This is known as a "private offering". After the security has been bought by the private equity fund it will gather the distribution from the smaller investors to generate a larger capital pool.

There are several things that you should consider before investing in private equity funds. The entry cost to invest in private equity can be quite substantial. Most funds will require an initial investment over $100,000 with additional money needed for continuing investment in the next few years. This is known as the "drawdown" period. The main legal form of private equity investments are limited partnership interests. These illiquid investments usually earn a premium over other conventional stocks and bonds. Once your money has been invested in private equity it can be difficult to access it since it is now tied up in investments that are long term. Long term can mean for as long as twelve years. The limited partners of a private equity fund usually don't have the power to insist that a sale takes place with any of the investments.

You may end up getting some of your capital back if the private equity fund is unable to find investment opportunities that are beneficial. There is the possibility that you can lose your entire investment if the fund chooses to invest in companies that are failing. If you want to venture in capital funds you have to accept that there are high risks. Many venture capital funds will fund new companies that are still in the early stages of their development. Risks will be lower if you fund companies that have low mezzanine capital funds since these companies have already proven their stability and are only waiting to raise funds from the public market.

Private equity funds can provide you with very high returns if you're willing to take the risk. Many of the best private equity funds will perform substantially better than public market funds, with possible annual returns of up to 30% when a fund is very successful. If you're going to invest in private equity funds you need to be able to have your capital finances locked in for a lengthy period of time. As well, you need to be prepared to lose large amounts of money when the fund is doing poorly.