Assets Private equity: capital investment with a longer investment horizon
Private equity investments are holdings in companies not listed on the stock exchange. They can offer additional returns, but also carry risks.
There are now a number of alternatives to classic investment options such as shares or bonds. Alternative investments are a great way of complementing and diversifying your portfolio. Read also “What are alternative investments?”.
Private equity is another investment opportunity in addition to hedge funds, derivatives and investments in tangible assets such as real estate or commodities. These are private investments in companies that are not listed on the stock exchange.
Equity investments of this type can be an additional source of investment returns, but due to a very long-term investment period and high illiquidity, they also carry risks. This article explains what forms of private equity are open to you as an investor, and what you need to consider when making such investments.
Private equity investments: three types you should know
Private equity investments: three types you should know
Many companies are dependent on additional capital at some point. Financing this additional capital with loans may be neither possible nor sensible. This can be the case, for example, if the costs of a loan are high or a company wants to pursue an ambitious growth strategy away from the public eye.
Qualified private or institutional investors are another way of obtaining financing.
Investors can then invest in companies directly via equity, indirectly via private equity funds, or via professional investment companies known as private equity companies.
Depending on the stage at which an investment takes place, a distinction can be made between three types of private equity:
Venture capital: supporting start-ups
The term “venture capital” refers to equity investments to finance the start-up, initial development or expansion of young companies.
Growth capital: helping companies grow
Growth capital typically refers to investments in established companies that need capital to expand or restructure their operations. This type of capital requirement also includes financing an acquisition or entering a new market without changing control of the company.
Leveraged buyout: financial support for acquisitions
Leveraged buyout (LBO) refers to the purchase of all or a large part of a company or business unit through equity from a small group of investors in combination with a significant amount of borrowed capital. The targets of leveraged buyouts are typically mature companies that generate a strong operating cash flow, i.e., high sales.
Returns versus risk: what you should consider as an investor
Returns versus risk: what you should consider as an investor
Investments in companies via private equity differ in many ways from traditional investments. These differences are also highlighted by the opportunities and risks of this form of investment:
Opportunities:
- Return and risk: Private equity investments have historically promised higher returns than listed equity – but the investments are also at higher risk.
- Low correlation: There is only a small correlation between private equity investments and stock market movements.
Risks:
- High capital investment required: In most cases, direct investments in six- to seven-figure amounts in Swiss francs are necessary. For private equity funds, a lower capital investment is also possible.
- Illiquidity and longevity: The capital is tied up for longer (seven to ten years) and cannot be easily disposed of.
- Low predictability: It is often difficult to predict how high a return might be and when it might be received.
- Transparency: Especially with private equity funds, it is not always clear which companies are being invested in.
In summary, the risk-reward ratio of private equity can make the investment an attractive addition to a diversified portfolio. However, the risks should not be overlooked, because investors also bear the entrepreneurial risk of private equity investments, be it directly or indirectly. Private equity investments are therefore usually only suitable for experienced investors with no major liquidity restrictions.
In the case of start-ups, for example, there is often a higher risk of default – e.g., if the company goes bankrupt. Even with investments in established companies, there is a risk that a company could get into trouble, that there will be no returns in times of crisis or that the capital will be lost due to bankruptcy.
Investing in private equity as an investor – for example via funds
Investing in private equity as an investor – for example via funds
A direct investment in a company is rather unusual. Not only does this require considerable financial resources, but also the appropriate know-how, network and experience, for example in the evaluation of a company. Also, an involvement via private equity companies or family offices (an asset manager who manages the assets of one or more wealthy families) often requires a considerable investment of capital.
However, private equity funds or funds of funds offer easier access to private equity
- Private equity funds: These are usually closed-end funds that invest over-the-counter in various portfolio companies. This means that investments in such funds are also more broadly diversified than direct investments in a single company.
- Private equity funds of funds: These are funds that invest in various private equity funds. Risk diversification is twofold: by investing in several funds, which in turn invest in different companies.
As with other investments, you should also check whether private equity investments suit your investment strategy and portfolio. We will be happy to help you.
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