Curated by: Rubric Advisors
Investing & Markets
Primer on Private Equity
Private equity involves investing in private companies through active ownership strategies, offering higher historical returns but requiring significant capital commitments and long-term illiquidity.
Primer on Private Equity
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What is Private Equity?
- Equity investments in private companies with growth and exit potential
- Active ownership approach with value-add initiatives like acquisitions and improvements
- Access to 81% of companies with $100+ million revenue unavailable publicly
- Requires specialized management and higher costs than public market investing
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Full Guide
What is Private Equity?
- Equity investments in private companies with growth and exit potential
- Active ownership approach with value-add initiatives like acquisitions and improvements
- Access to 81% of companies with $100+ million revenue unavailable publicly
- Requires specialized management and higher costs than public market investing
Historical Performance and Considerations
- Some long-term studies have shown private equity outperforming public equities, though results vary widely by manager, vintage year, and time period
- Any outperformance is often attributed to an illiquidity premium, active management, and access to private companies, and is not guaranteed
- Provides diversification beyond public equities across multiple business sectors
- Reported volatility can appear lower than public markets, but this largely reflects infrequent, smoothed valuations rather than lower underlying economic risk
- Past performance does not guarantee future results, and private-equity returns are not directly comparable to public index returns
Types of PE Strategies
- Buyout strategies use leveraged buyouts combining equity investment with debt
- Growth equity targets rapidly growing companies preparing for IPO or sale
- Distressed investments focus on struggling companies near bankruptcy for turnaround
- Strategies vary by geography, sector, company size, and concentration
Investment Structure Options
- Traditional funds require 10+ year lockups with high investment minimums
- Evergreen funds offer potential earlier liquidity with lower minimums required
- Fund of funds provide diversification but charge two fee layers
- Direct transactions offer lower fees but require high expertise and capital
Major Risks and Downsides
- Illiquid investments locked up for 10+ years with difficult valuations
- Leveraged strategies amplify both upside and downside investment potential
- Higher interest rates may reduce future returns compared to historical performance
- Complex tax filing requirements with K-1s and multiple state filings
Fee Structure Considerations
- Typical 2% management fee plus 20% performance fee structure
- Fund of funds add additional fee layer reducing net returns
- PE must outperform public markets significantly to justify higher costs
- Direct transactions generally offer lower or no fee alternatives
Key Takeaways
- Only suitable for high net worth investors with long-term liquidity horizons
- Offers diversification and higher return potential but requires accepting illiquidity risk
- Choose investment structure based on expertise level, capital availability, and objectives
- Consider fees, tax complexity, and correlation risks before committing capital
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Venture capital offers qualified investors access to high-growth private companies with potential for substantial returns, but requires careful consideration of illiquidity, high fees, and significant risks.
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