Private equity involves direct capital investment into companies. Many investors will do this through private equity investment vehicles, rather than directly providing capital to a business, due to the large sums often involved in each investment.
There are three ways in which private equity managers invest in companies. They provide capital for early stage businesses, capital for established companies that require money to develop, or they provide finance for a management buy-out, or buy-in.
Private equity is an illiquid form of investment. It usually takes a number of years for a fund manager to find the right opportunities to invest his capital and it often takes many years to realise a return. This is primarily achieved through the company being acquired, or listing on a stock exchange.
It is difficult to judge the likely returns and correlation of private equity to other asset classes, because performance varies significantly from one private equity fund to another. Not only is private equity relatively illiquid, it can also lack transparency, can be risky and difficult to access. Nevertheless, there is the potential for much higher returns from private equity than from listed equities. Some investors choose to use collective funds to access private equity, because of the diversification these funds provide.
It can be a particularly attractive asset class for entrepreneurs who have become wealthy through selling a business, as a way of helping other liked minded individuals to build their business in a similar manner.
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