Things to Know Before Investing in Private Equity

Private equity can be a very risky business and choosing the wrong firm can lead to significant losses. There are certain things you need to know before spending money, but we have you covered with these essential tips.

Experience and Expertise

One of the most important things you need to look for in a private equity firm is their experience in performing successfully and has the knowledge necessary to make the most of your investment. Is the private equity firm hitting its target, or is it falling behind? While this isn’t the only thing that a great business needs to have, it’s one of the most essential because you want your money handled by someone who can manage properly and make a profit once the fund is completed.

Team Performance

Choosing a top firm can be essential, but what makes these groups perform year after year is the fact that they have an excellent management team put together. You don’t necessarily have to go with one of the top private equity firms to make a profit. Pay close attention to the performance of the team rather than the overall group. Individuals deliver returns, not a firm’s brand name. If the top deal maker leaves, then the expertise and experience go with them.

Long-Term Market

Private equity doesn't give fast returns, but it can create easy profits if a great team manages the fund properly. Unlike stocks and other securities, private equity funds are a long-term market and have an average of 5.5 years for investments. This means that it can take five years or more for a private equity firm to acquire a business, improve financial status, and then sell it through IPO or another method for profit. After this amount of time, you’ll see a profit, but the money is tied up until the firm decides that the profit is at its peak.

Diversification Importance

Diversification is what every investor should focus on, even with private equity funds, because it keeps you from losing everything in one field. For example, if you invest in energy and the sector plummets, you’ll lose all your investments. However, if you have your funds spread out across several different areas, then you may not see a significant impact should one underperform. Additionally, investing in various companies gives you more chances to support a company that can make a substantial profit.

Risk Level

Private equity can be fairly risky because many firms use a significant amount of debt to purchase businesses. This decreases the overall financial stability of the investment, especially if investors should call on their debt. The firm would have to produce the money, which could cause a collapse of the fund, a huge loss for all other investors, and the possible destruction of the business that’s being reconstructed. Additionally, there’s a substantial amount of risk that the acquired company may not make enough profit and perform well for investors.