What are Private Equity Funds?

By Altive.16 6月 2021
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What are Private Equity Funds?

What are Private Equity Funds?

Private equity funds are collective investment schemes used to invest directly in equity securities of private companies through specific investment strategies associated with the private equity.

Private equity funds generally fall into two categories: venture capital and leverage buyouts. They either invest in small and early stage businesses that have limited access to capital, or use leveraged buyouts to acquire mature but financially distressed companies.

Once they control interest in the company, private equity funds often assign a group of corporate experts to manage the acquired companies, looking to improve the company performances, with the eventual goal of selling the stakes for a profit. 

Private equity fund comes with a fixed investment horizon of typically from four to seven years, when the PE firm decides to exit the investment and realize the gains.

Exit strategies include IPOs and sale of the business to another private equity firm or strategic buyer.

 

Reason for investment

Private equity funds investments often offer attractive premiums. Regarding the long running-public debate about whether private equities provide significant illiquidity premium, they do outperform the public market consistently.

Although private equity funds imply extremely high risk, idiosyncratic risks in private equity investments are said to be more controllable than the public market risk nowadays.

Private equity managers are able to access greater depth of information on proposed company investments. This greater level of disclosure contributes significantly to reducing risk in private equity investment. In addition, the 'carried interest' traditional scheme in private equity funds incentivizes managers to seek absolute return and achieve net cash returns to investors.

Apart from performances, private equity funds provide diversification for portfolio investments, since low return correlation of public and private equities can be observed in the current market.

 

Trend of Private Equity Market

The combination of fiscal and monetary policy continues to affect returns in publicly traded assets like stocks and bonds. Stocks are more expensive than ever, while bond yields are bottoming out and bond's correlation to equity is increasing significantly, a rising number of investors target private capital instead, especially private equity.

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