What is Private Equity?
Private equity typically refers to an investment fund organized as a limited partnership company with limited partners as investors and a general partner responsible for the management of the fund. The reason why it’s called private is that its capital is invested in companies that are not publicly traded. These are privately held companies and these companies end up being owned by the limited partners and the general partner. This means that it’s not public and it’s not traded on the stock market or any exchange.
So private equity is an alternative investment class that allows people to diversify or to invest directly into a company and become owners of that company. The private equity fund is a pool of money looking to invest or buy companies. So rather than have shareholders investing in a company, you have these private investors.
And usually, the private equity firm has no operational responsibility. All they do is raise money and buy and sell these different companies. And some of these companies own real estate. These companies become part of the overall portfolio.
What Are The Advantages of Private Equity
So, the big advantage of private equity firms is that they’re not subject to public scrutiny. This means that they don’t have to provide quarterly earnings and they don’t have any special reporting requirements. And what this does is that it allows them to have a longer-term approach to better invest and make better decisions as it relates to the overall strategy for the company.
Private equity firms make money through management fees; through carried interest … that’s interest above and beyond what they’re going to pay their limited partner; and through any dividend recapitalization.
Private Equity versus Mutual Funds
Private equities are different from mutual funds. Private equities invest in private firms or private companies and mutual funds invest in public companies. So, they are very similar. Just one invests in private companies and the other invests in public companies.
How to Invest in Private Equity
So, you can invest in private equity directly with the private equity firm or you can invest through an investment advisor. And now they have a lot of these crowdfunding sites where you can invest in a private equity firm.
SEC Requirements
For private equity firms to become classified as private equity they have to file an exemption with the Securities and Exchange Commission (SEC). There are a couple of different exemptions that exist that would allow them to go forward and raise money privately and not have to be a public company.
Who Can Invest in Private Equity?
Private equity investments are usually available only to accredited investors and sometimes qualified investors. And the initial investment is usually a lot higher for Private Equity than mutual funds or REITs, which we talked about in a previous discussion.
