CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Investing in private equity: how does it work?

By Alexandra Pankratyeva

08:34, 9 August 2019

Share this article

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
Invest in private equity

Investing comes in different forms and shapes. Instead of buying stocks of publicly traded companies, commodities, currencies, bonds, ETFs or other traditional assets, you may think of private equity investment as a popular alternative to make your money work.

What is private equity?

Private equity is an alternative investment type, which involves capital that is not publicly listed on traditional stock exchanges. The private equity market works through investors and funds who directly invest in private companies, participate in buyouts of public companies or contribute venture capital.

When investing in private equity, retail and institutional investors provide money that can be used to fund the development of a new technology, to restructure business and improve its profitability, to conduct some effective acquisitions or converting a public company into private.

What is your sentiment on EA?

124.77
Bullish
or
Bearish
Vote to see Traders sentiment!

Introduction to private equity: advantages and disadvantages

Private equity offers a range of advantages for private companies and startups. It gives them an alternative source of liquidity instead of traditional financial mechanisms, including public listing or bank loans with high interest rates.

Particular forms of private equity – venture capital – could finance companies at the very early stages, often considered the ‘seed stage’. In the case of unlisted companies, private equity helps them to adopt innovative growth strategies without the pressure of quarterly earnings inherent to the traditional public market scheme.

Still, there are also some difficulties related to private equity investments. Unlike with public markets, there are no buyers and sellers available in order to make private holdings liquid. Prices for shares are determined in the course of negotiations between buyers and sellers and not as a result of market forces. Moreover, the shareholders’ rights in private equity are also decided during negotiations, and not regulated by an established framework of public markets.

Reasons to invest in private equity

Why should you consider investing in private equity? Let’s point out some noteworthy factors.

  • Returns in private equity depend on absolutely different factors than in public equity markets, which makes private equity investments a great diversification instrument,
  • Instead of focusing on quarterly earnings as we usually do in public markets, private equity ownership provides the possibility to focus on long-term performance results. Eventually, it may help to generate larger returns.

Private equity vs. public equity

Private equity has some features that differentiate it from public equity, like private ownership. Private ownership more often presupposes active ownership, which contrasts with passive public equity investors. Pursuing greater profits, private investors can take greater risks and get involved deeper into the private equity business.

Private equity

US100

11,547.10 Price
-0.700% 1D Chg, %
Long position overnight fee -0.0167%
Short position overnight fee 0.0060%
Overnight fee time 22:00 (UTC)
Spread 3.0

BTC/USD

17,175.40 Price
+0.140% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 60.00

Natural Gas

6.24 Price
+6.110% 1D Chg, %
Long position overnight fee 0.0601%
Short position overnight fee -0.0882%
Overnight fee time 22:00 (UTC)
Spread 0.006

XRP/USD

0.39 Price
-0.140% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.00329

How private equity works

Companies can attract private equity at different stages of their development in order to improve their performance. Private investments can play a major role in the company’s development and growth.

Private equity is a highly effective alternative investment method, capable of progressing from early-stage venture capital to the business growth stage and beyond.

The major types of private equity investments:

  • Venture capital. Investing in startups and early-stage businesses.
  • Growth capital. Investing, which helps the company to grow and mature, to launch a new technology or product.
  • Buyout capital. Investing used to buy an existing company or its division.
  • Mezzanine capital. Debt financing.
  • Restructuring capital. Investing in distressed companies, which are in the process of reorganization.

Invest in private equity

How to invest in private equity

Wealthy individuals and institutional traders are often interested in private equity investments. The money often goes to companies believed to make a difference in spheres such as software development, biotechnologies, telecommunications and healthcare. Investors try to contribute and add some value to the companies they invest in and improve their profitability.

However, the private equity market is not so easily accessible. The majority of private equity companies are looking for investors who can put in at least $25 million. Although there are companies that require only $250,000, this number is still beyond the reach of most ordinary investors.

The most common ways to invest in private equity are:

  • A fund of funds typically holds shares of various private partnerships, which invest in private equities. It provides investors with an efficient mechanism to reduce the initial required investment minimum. It also serves as a good diversification and hedging instrument as it may invest in hundreds of private companies from different sectors.
  • Private equity ETFs usually follow an index of publicly traded companies that invest in private equities. This type of private equity investing is pretty simple, as you can buy them on a stock exchange and there is no any required investment minimum. Still, private equity exchange-traded funds presuppose a management and a brokerage fee.
  • Public shares of companies managing private equity funds is another indirect way of private equity investment. Buying the shares or such companies you still get the benefits of investing in private equity. As private equity managers invest in a range of funds, it helps to spread the risk.

Rate this article

Share this article

Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Economics headlines

Still looking for a broker you can trust?

Join the 480.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading