To newcomers the world of finance and investment can often be intimidating or down right bewildering at best. How does the stock market work? What is the difference between privately traded companies and publicly traded companies? How can the average person even begin to get started?
To many beginning investors, getting started with publicly traded stocks seems like the right way to go – it is fairly straightforward, there’s loads of information out there and cashing in your stocks is rarely much of a hassle.
Private equity, on the other hand, is an entirely different prospect all together – it can be intimidating, complex and feels out of the reach of anyone who doesn’t have a spare million in their back pocket.
That doesn’t have to be the case though – private equity can be a realistic strategy for newcomers all on its own and I am here to tell you why.
What Is Private Equity Anyway?
First things first: private equity is basically any capital that is not listed or traded on public exchanges like the stock market. Simple right? Not at all confusing, correct?
Well, to break it down even further, you can think of private equity as the trade that goes on behind closed doors directly with the involved partner.
Typically, a high volume of private equity purchases will revolve around buying out stakes in a struggling business and then selling it on or listing it publicly once its finances have improved.
What Makes Private Equity Such Big Business?
Private equity is all about treating businesses and organisations as pure capital – buy low, sell high but at a macro level. This can make it an incredibly profitable venture if you have the capital to make the initial investment.
The vast majority of private equity firms and consultants command a huge amount of investment potential, spending massive sums to buy out a company that is struggling, restructure it and then sell it on when it increases in value.
These firms are often the real big players in finance, and they can attract top talent from across the sector, while utilizing the support of private equity law firms, such Goodwin, to carry some of the weight.
These firms aren’t the only players of the game. Large private equity funds and pension funds leverage the accrued capital of their members to invest, before returning the profits back to the individuals. This can mean less of a profit on an individual level, but it makes private equity accessible to those that don’t personally have huge amounts of capital to throw around.
Why You Should Pay Attention
Unless you find a cool £10 million tucked down the back of your couch, it is safe to say that large scale profits and returns from private equity are out of the reach of the average Joe – but that doesn’t mean it is a sector that you should ignore entirely.
Buying stakes in a private equity fund, or other communal fund, can be a smart way to expand your portfolio as an investor.
Unlike trading in public stocks, private equity trades are typically far more controlled with a clearer path to a return in investment.
Let’s put it this way – when you purchase stocks publicly, you are essentially betting on the success of others in a way that is entirely out of your control. These businesses will be making financial decisions while considering their employees, personal salaries, the vision for their company etc. All you can do is decide when to buy or sell.
When you invest in private equity, you are investing in the experience and success of the privately owned firm or fund, with a clear idea of how they intend to turn a profit - and profit is the only goal that is important to these firms.
While, like all of investment, private equity is by no means a sure thing, it can certainly be a more reliable way to ensure a return on the money that you invest. After all, isn’t that the point of investing?
