Special Commentary • August 25, 2022
[Ravi Ugale] What is private equity?
The term private equity encompasses investments and businesses that are not listed on public stock exchanges. In order to invest in privately held companies, private equity firms create funds with a set duration, typically a term of 10 years. These funds are investment vehicles that pool the money invested in the fund typically by institutional investors and high-net-worth individuals. The capital from investors is invested, or called, in increments until the whole investment commitment is met.
PE funds are largely organized by stage, geography, or strategy and have the same basic objective: to provide capital and expertise to a company in order to foster growth and create value for the investors.
The managers invest in a portfolio of various private businesses. They also share in any successes or losses with their investors. There are a number of different private equity strategies. Two of the most well-known are venture capital, where the manager invests in startups and early-stage companies, typically in the technology or healthcare segments, and leverage buyouts, where the manager takes a controlling stake in an established company, typically using a significant amount of debt, thereby, increasing risk and potential returns.
Why should one consider investing in the private equity asset class?
In our view, private equity provides a compelling and meaningful opportunity set for investors who are qualified to participate as there is a larger universe of private investable companies available compared to public stocks. Private equity historically has delivered higher returns than public markets.
Private equity investors expect to receive a premium of 3% to 5% in excess of public market returns because the investment cannot easily be sold quickly for cash. This excess return has tended to be significantly greater for the top 25% of private equity funds, which highlights the importance of researching and selecting managers.
When constructing investment portfolios, the private equity asset class also offers diversification benefits. Even though investing in private equity can be risky, adding an allocation to portfolios may help to reduce the overall risk of those portfolios while maintaining or increasing the expected return.
Private investments aren't priced daily unlike stocks on an exchange. This can help reduce the extent of overall portfolio values wins investors experience.
Why aren't private equity investments included in more portfolios?
Investing in private equity typically requires that investors meet certain qualifications, such as a high net worth. Additionally, private equity funds often require very high minimum investments.
As mentioned earlier, private equity investments are illiquid and cannot easily be sold for cash quickly. In short, they can tie up a great deal of money for a lengthy period of time. And due to the lack of a reliable index or even observable market prices, it can be difficult for investors to make informed decisions about individual options. For these reasons, it is recommended that investors work with a trusted private equity advisory service when exploring this asset class.
Is private equity right for you? Let's review the essential takeaways.
Private equity is a unique asset class that may offer higher returns relative to the public markets in exchange for taking on higher levels and different types of risk. Including private equity in investment portfolios can provide diversification benefits resulting in an improved risk-reward profile. Because of the unique characteristics of private equity investing, expert manager research and due diligence are essential to achieving desired outcomes. Your Truist advisor can help you determine how private equity investments may fit into your portfolio.
Your financial journey is unique. Your vision, values, and aspirations are your own and always evolving. Your Truist advisor can customize your strategy so everything works together seamlessly.
Managing Director of Private Equity and Credit Strategies
Truist Advisory Service, Inc.
Private equity is the investment of capital in private companies. See how it can provide a meaningful opportunity for qualified investors.