There are numerous investment vehicles available in the modern age, with private equity assets having gained significant traction of late.
This is despite the fact that private equity is categorised as an alternative investment class, and one that consists of capital that is not listed on a public exchange. Typically, it comprises funds and may also engage in the buyouts of public companies, offering access to assets that may otherwise be unavailable.
In this post, we’ll look at the benefits and risks associated with private equity investments, while asking whether such vehicles are right for you.
The Benefits And Risks Of Private Equity Investments
Interestingly, it’s the fundamental nature of private equity investing that underpins its appeal, as it has a history of delivering inflated returns.
Such returns aren’t typically available through other investment methods, with research carried out by Harvard professor Josh Lerner and the consultancy Bain & Co. revealing that individuals who have placed money into private equity made an average annual return of 15.3% in the 10 years to June 2019.
However, such returns come with considerable risk, and there’s no doubt that private equity investments require a higher degree of management than other asset classes.
This is despite the fact that private equity investments often cover a range of valuable and high growth industries, including technology, healthcare (which is particularly pertinent in the current climate) and biotechnology.
In terms of market risk, private equity investors must consider the fact that they have no guarantee that any of the assets included in a fund will grow at all. While this type of risk is present in any type of investment, failure is much more common amongst the small cap stocks that typically frequent private equity funds.
There’s also a high barrier to entry associated with private equity investment, as an inflated level of capital is required to access chosen assets.
Even in the case of relatively accessible private equity firms, you may find investment minimums as high as £250,000. This is far higher than most investment vehicles, although it also drives the type of larger gains we discussed earlier in the piece.
Liquidity risk is also a concern for investors in private equity. Liquidity measures the ease at which assets can be bought and sold, but the relatively slow nature of earnings growth for aforementioned small cap stocks make it hard to exit a private equity investment within a relatively short period of time.
How To Manage These Risks
As the private equity market becomes increasingly crowded, emerging markets have also grown to provide strong appeal and revenue generation for investors.
However, this has also introduced the element of geopolitical risk, particularly in the form of war, trade conflicts and embargos.
To mitigate the fundamental risks associated with private equity investment, you should consider seeking out proactive insurance coverage from suppliers such as Gallagher. This will help to provide a basic safeguard for your capital investment, while potentially providing safe access to a wider range of private equity markets.
This includes emerging market assets, as you look to move into new territories without placing your capital at the threat of too much exposure.
