Private equity is direct investment in an enterprise by a private investor or group of investors. It is essentially post-startup venture capital, designed to expand a working business model and market without the burden of becoming a publicly traded company.
One of the key advantages to private equity is investors’ ability to acquire a controlling share in a company and then use that influence to guide the company’s operations, often as part of a larger investment strategy. Some investors use this process to take a publicly traded company private.
While most believe getting in to private equity requires large capital outlays and a wide network of partners in appropriate markets, the truth is there are more opportunities for investors to join this category than ever before.
The Public/Private Firm
A good example of a private equity strategy for the general investor is the firm or fund with a charter to seek PE opportunities and then offer shares in the investing company to the general public. This is distantly similar to the process by which some Hollywood films are made, although in most of those cases, the controlling entity is set up as a partnership to give management the flexibility necessary to guide an often unusual development schedule.
For the average investor, a finance only option is likely the best of both worlds. Kitchen-table equity partners aren’t likely to have the time or the sophistication to involve themselves in daily operations, reverse buyouts and complex meetings. Their involvement is likely more passive, which makes “strict financier” arrangements much more practical.
Elsewhere on the PE spectrum is the fund manager approach, which gives investors the option to enlist an executive or executive team to make investments in multiple firms, often in the same market segment. While this might sound a lot like a mutual fund, the fact is the private nature of the arrangement gives the equity partners wide latitude to change direction, take a more active role in a company’s operations or abandon a strategy for something new.
One thing investors should be aware of is the fact that private equity has few, if any, of the safety nets afforded retail investors by facilities like brokers, stop loss orders, liquidity requirements and the ability to know the price of their shares on demand. Private equity can also often take much longer to pay off than a more conventional vehicle like a stock or certificate of deposit. As always, it is a good idea to consult a financial advisor before making important investment decisions.