The term private equity seems to be a compound word for a layman who does not understand the financial market fully.
Today, I will walk you through what you need to know about private equity. Hence, letting you know all that surrounds it. First, it is of outstanding importance that you know why the name is called private equity.
It is called private because it belongs to a person or company and equity because it is exclusively geared towards equity investments. private equity is interchangeable debts that can help companies achieve unusual growth strategies. Simply put, they are funds that have not been listed on the stock exchange.
Most private equity particularly targets a specific type of firm based on their development/ life cycle stage. Firms that private equity target:
- Private equity targets young firms with high growth perspectives and a promising management team.
- They are also focused on established companies with stable cash flows. Leveraged buyouts transaction.
- Also, it is common to find private equities investing in a distressed company I.e companies with unprofitable units or assets. In distressed investments, there is an overlap between private equity and hedge funds. Both types tend to engage in distressed companies a lot.
You are probably wondering what hedge funds are? Hedge funds are simply another investment aimed at safeguarding the investment portfolios from the market. Hedge funds are more likely to engage with private firms.
However, the main difference between public equity and hedge funds is their investment boundary.
The group of people involved in private equity includes:
- The one who supplies the money (investor)
- The private equity company that manages and invests the money via a private equity fund.
- Lastly, the company the private equity will invest in.
Comparison between Hedge funds and Private equities
Private equities will want to acquire all of the target shares I. e De-list it, change management and introduce oriented measures towards improving financial performance and then be patient for at least a couple of years before exiting the investment (2+ years) either through a sale or a new list it.
On the other hand, hedge funds have a shorter duration. They will buy the securities of a company with unprofitable units or assets. When they believe they are a way of selling these securities in a short period and make a profit no longer than 2-3 months.
Private equity firm structure
There are two main ways a private equity firm is structured. There are:
- Limited Partnership: This kind of structure is a very known structure. A good instance is the shikana law group investment firm that not only renders her services in investment advisory but also provides solutions that lead to strategic growth alongside excellent risk management. Now, this kind of partnership is of two types:
- General partner: This category is involved with the management of the fund, target company portfolio selection and lastly post-investment advisory. General partners charge their partnership a management fee and of course have the right to receive carried interest of 2-20% compensation, which is the known compensation station. Where 2% is paid as the management fee I.e capital and 20% profit at a break-even point.
- Limited partner: Their role is to provide investment capital. Limited partners receive all of the funds proceed minus the 20% profit that is being paid to the general partner.
- Close-end fund: The structure is presently used in Europe. Here, entities are created. Investors provide for that entity and the management firms sign a management contract with the entity.
Five things to know about private equities
- Private equities work extremely hard to build their firms. Simply by investing money and expertise to create value in aspects that will make them stand out. The few ways they do this is:
- Rebranding their concept to turn it into a trendy market sale point for them.
- Building integration of fresh competitors.
- Speaking their footprint widely and this particularly is what Ishikawa law group investment firm in Tanzania is trying to achieve.
- It takes 10 years for a private equity firm to liquidate.
It is no doubt that the existence of a company is tons of adventure which makes private equity a risky investment when capital is not involved. Although you may expect all money to liquidate between 5-7 years of investment.
- Private equities are merited by firms because it allows them to reach out for liquidities another way to financial tools. In the likes of bank loans, high interest etc on common markets.
- Private equities generate capital.
One major thing private equities are known for. It’s the obtaining capitals from limited partners or the outside monetary institutions either gotten from rich persons, pensions, retirement funds etc.
The key investors in private equities also invest a fraction of their money but there is a little percentage compared to the percentage of the capital of the limited partners contributed to be part of the fund.
- Oversight through developments and cutting costs.
Even if the private equities don’t get involved in the daily smooth run of the portfolio firms. They however get involved through their support and monetary advisory.
The height of the participation is determined by the size of their risk in the company. If their risk happens to be little then their involvement will be limited but if the stake is reasonably high then their participation will be high which in the end will bring in much gain.
One good example of a firm that operates through development and cutting costs is the shikana Law group investment. They are situated in Tanzania, Kenya and Zanzibar. They place a premium priority on their prospects/cases (their incomes, prominence and monetary well-being) and condition their needs into every judgment they make.
They also map out customized techniques and pursue through with final procedures. They are your confident guide in East Africa.
- It is your commitment.
There’s practically no liquidity with private equities. But the interesting thing about this is that the development of the life span is for 10 years. You can decide to extend if you deem it fit.
Types of deals specialized in private equity.
The private equities can generate again with your private equity funds in a few considerable ways depending on the investment the company is specialized in. The two most common deal in private equity are:
- Buyouts: This deal involves a private equity firm buying a target company with the sole aim of selling to Mark a profit/gain at them. Private equity may discover a public or private company if it is a public company, It will be aligned to private purchase. On several occasions, the equity firm can use up capitals to make this deal or even borrow. They look out for firms with a promising quality for better performance, buy it and make an improvement on it and turn around to sell it off at a much profitable bargain also referred to as exit.
- Venture capital: While buyouts seek to take charge of firms that have reached a mature stage. Venture capital focuses on firms that are still it’s initial stage scouting to gather money in trade for equity in their firms. The aim here is to invest in initial stage companies with a promising quality for huge improvement ability either at a delay or it is made open through IPO( initial public offering). After the phase of the IPO, the firm’s licensed risk can successfully be transformed into shares and traded in the common market for a profit.
P.s: IPO is a situation where private firms go open to selling their stock to the common public.
How do I start investing in private equities?
To be able to invest in public equities, you need to have a good knowledge of it and perhaps work with private equity. You get to choose which private equity options that you find very comfortable to pick from.
Examples are the fundraising schedule, areas of expertise, exit strategies etc If you want to be an average investor I.e you want to invest directly with private equity. Then you need to be an accredited investor, you can actualise this through a medium called private equity ETF which means Exchange-traded funds.
This fund offers exposure to a private equity firm that is openly listed. And when you invest in an ETF they help you track these companies that are not openly listed and you also earn glory.
Aside from being an accredited investor to enjoy this, you can start investing with private equity if you Can’t meet up the minimum value involved.
You can begin to invest using the online broker. Open an account through an online broker, credit money into the account and use the ETF that rightly fits you.