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Everything You Need to Know About Private equities

Table of Contents

What is Private Equity?

What do Amazon, Apple, Facebook, Tesla, and Microsoft all have in common?
They all started as private companies, typically with a small group of initial investors (often called angel investors). If you went back in time, wouldn’t you invest in these companies from the very beginning?

“Private Equity” is a general term for investments in privately held companies, also known as “Private Markets” or illiquid alternative assets. Private Equity involves investing in privately held companies, ranging from small, early-stage growth companies to large enterprises across various industries and locations. It can be a way to invest in some of the most innovative and transformative companies before they become well-known household names.

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Types of Private Equity Investments

We mentioned “start-up” examples, but a whole universe of private market investments exists. They range from start-ups to mature businesses, including real estate, infrastructure, and private lending. These opportunities, which are not typically available to the general investing public, offer an exclusive chance to diversify your investment portfolio.

Infrastructure

Infrastructure

Energy transition, digitalization, enhancement of aging infrastructure.

Real Estate

Real Estate

Commercial real-estate across multiple sectors.

Venture/ Growth

Venture/ Growth

Early stage, fast growing companies.

Private Credit

Private Credit

Debt investments outside of the public markets.

Buyout

Buyout

Mature businesses with positive cash flow.
Private companies play a crucial role in the global economy and can take a more long-term approach compared to public companies, which often focus on short-term fluctuations in share prices.
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What Are Private Equity Funds?

There are different ways to invest in private equity, but a common method is through a private equity fund. A private equity fund is a collection of money used to invest in privately owned companies that match a set investment strategy. The fund is managed by a private equity firm, which acts as the ‘General Partner’. Investors who contribute money to the fund become ‘Limited Partners.’

Opportunities For The Long-Term Investor

Private equity funds aren’t investments that go on indefinitely. The “Fund Term” is the finite life of a fund, unlike public equity funds that operate on a rolling basis. The cash lifecycle of a typical fund is usually ten years with optional extensions.
A fund’s life is generally viewed in three parts:
  1. Investing Stage: The pre-launch investing period is formative and involves creating the private equity fund, determining the strategy, drafting offering documents, securing funds from investors, and identifying initial and investing in target companies.
  2. Development Stage: The development period is when the fund implements strategic, operational, and financial improvements to enhance the investments growth and profitability potential.
  3. Liquidation Stage: Also known as harvesting, this is the period during which the manager arranges exits from target companies and distributes capital to investors.
Private Equity Life Cycle chart
Disclosure note: Cash flow profile chart and discussion is for illustrative purposes only and is intended to reflect how a private equity fund calls capital in the first few years on investment followed by several years of distributions. There are no assurances that an investment in private equity will achieve its objective or avoid substantial loss.

Pros and Cons of investing in Private Equity

Institutional investors, such as hedge funds, mutual funds, endowments, and wealthy individuals, are often attracted to private equity investments. Their capital provides funding for early-stage ventures and plays a significant economic role. However, there are other factors to consider when investing in private equity.

Positives:

History of outperformance

Private equity has historically outperformed stocks with lower volatility long-term, providing extra compensation due to illiquidity. Carefully adding private equity to a traditional stock and bond allocation can enhance portfolio returns and lower risk, as illustrated in the chart.

Allocations to alternatives benefit both the return and risk profile in investors’ portfolios across multiple decades.
Source: Bloomberg, Burgiss, HFRI, NCREIF, Standard & Poors, Factset, JP Morgan Asset Management. Allocations to alternatives benefit both the return and risk profile in investors’ portfolios across multiple decades.

Asset Class Diversification

Private equity has a low correlation with public equities, offering diversification benefits. Managers invest capital directly into private assets and work to increase their value over time.

Vast market opportunity

The universe of private equity is vast, since most companies globally are privately held. In contrast, the number of publicly traded U.S. companies has dropped significantly.

Downsides:

A long-term investment horizon

Private equity investors typically need to allow for a 5 to 12 year investment horizon.

Due diligence of general partners is critical

The primary expertise of a private equity firm lies in managing a fund, so the Limited Partners delegate all control to the General Partner. General Partners add value by selecting management teams, improving operations, governance, and financial structure.

Limited Access

These funds may not be readily available for the average investor. Investors need to meet asset requirements to show they have sufficient liquidity to meet initial investment and capital calls.

How To Invest In Private Equity

There are limited avenues for investing directly in private equity. It’s essential to be aware that these investments can be risky. It’s also worth noting that many private equity opportunities are exclusively available to qualified investors, and may demand a significant minimum investment and high net worth.

Trajan Offering Examples

Trajan Wealth’s private equity offerings are intentionally boutique and exclusive. Our private equity fund opportunities have been selected with hands-on due diligence and strategic expertise. We also have lower minimum investments than larger firms, meaning less risk. Lastly, we negotiate private equity fund management fees, which can mean more returns for investors.
These are some of Trajan Wealth’s offerings as of the summer of 2024 and are subject to change. We are expanding these offerings as we carefully vet each fund. Don’t hesitate to contact us for the latest information.
Deciding if Private Equity investing is right for you?

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*Investment in private equity may require accreditation.*