Characteristics:
Private equity means investing in companies that are not listed on the stock markets. One exception is companies that have decided to de-list themselves, a process known as public to private.
Private equity calls for an investment horizon of at least 10 to 15 years. Investors should not expect any distributions in the first few years. It is only when the companies are sold again that investors will see returns.
More than with any other type of investment, the expertise and experience of the management team are vital elements that determine whether an investment will be successful or not. The difference in returns between those generated by the top quartile of such professionals and the average is striking. The ability to select the best managers and access their vehicles is crucial.
Opportunities:
Private equity investments can generate above-average returns. Since they are mostly not listed on an exchange, they are not subject to the short-term fluctuations typical of the stock markets, and are thus suitable for diversification. Added to a portfolio, they typically improve its overall risk-return profile.
Risks:
Private equity investments are illiquid and can lead to capital losses. Smart, professional diversification and the selection of the best fund managers can reduce these risks, however.
How do you go about investing in private equity?
Indirect forms of investment in private equity, where you delegate the choice of the individual firms to experts, make sense for the majority of investors. At UBS, investors need to have usually around CHF 5 million available for such investments.
