The Key Takeaways
- Private equity refers to an investment made in a privately-held company.
- When you own shares in a company that is publicly traded on a stock exchange, this is called public equity.
- Only institutional and high-net-worth investors can invest in private equity, while all investors can own public equity.
- Private equity can yield higher returns but it comes with unique risks such as illiquidity and high management fees.
What is Private Equity?
Private equity refers to an investment in a company or group of companies that isn’t listed on a stock exchange. Accredited investors and institutional investors (also known as institutional investors or hedge funds) are the sources of capital.
Private equity funds pool capital from many investors to invest in private companies with the aim of adding value. This type of fund is typically a limited partnership, meaning that investors are only responsible for the amount invested in it. General partners manage private equity funds. They choose the investments and manage them. General partners are responsible for any potential debts that may arise if the fund is insolvent.
Private equity funds have a management fee and a performance fee. A typical management fee of 2% covers fund operations and administration costs. You can pay a higher performance fee if the fund has a positive return.
Private equity investments are more profitable than traditional asset classes. However, they have a longer holding period, typically between five and ten years. You may also need to make additional investments as they develop, rather than one large initial investment.
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What is private equity?
Private equity refers to funds that are raised by private investors and traded on a stock exchange. Venture capital is a popular strategy for private equity investments. It involves wealthy investors and firms cutting checks to startups that have growth potential. They receive shares in return. The value of their shares usually increases when the company goes public.
Growth equity is another strategy. Private equity investors look at the financials and performance of private companies to identify those with continued growth potential and then make investments in them. This funding can be used for expenses such as hiring additional employees or leasing office space.
A private equity firm can go public.
Private equity firms have the option to go public in order to raise capital from a larger pool of investors. S&P Global Market Intelligence reports that the number of private equity companies that went public almost doubled between 2020 and 2021. The majority were located in Europe. Experts predict that IPO activity will slow as markets stabilize.
Is private equity more efficient than public equity?
A McKinsey report for 2021 states that private equity has consistently outperformed public equity over the past two decades. Private equity has generated 14.3% annualized returns over a 10-year span, while the S&P 500, which is a reasonable benchmark for public markets, returned 13.8%. Private equity also produced a 9.9% annualized returns over a period of 20 years, while the S&P 500 returned 6.4%.
Private equity investing has risks that are not present in public equity investing. This is why it's only available to wealthy investors. High active management fees, high investment minima, and illiquidity are all risks.
What is public equity?
Public equity investments refer to shares in a public company that is listed on a stock exchange such as the New York Stock Exchange and the London Stock Exchange. All investors can access public equity, regardless of their net worth. The rules for public companies are strict. They must disclose financial activity to the public.
There are a few reasons why public equity investing is attractive:
- Liquidity Public shares can be easily bought or sold at a public exchange in minutes, or even seconds. Private equity has little or no secondary market.
- Transparency The public equity markets are tightly regulated to protect investors from unforeseen risks.
- Growth Not all companies listed on stock exchanges are successful. However, they must achieve a certain level growth in order to be public. The stock market's value tends to increase over time, both taken together. The average annual return for the S&P 500 since 1928 has been 10%.
What's an example of public equity,
Public equity investments can include buying individual stocks. Investors can also get exposure to public equity through mutual funds or exchange-traded funds. They also offer diversification because ownership is spread across multiple companies and industries.
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Take Note
Private equity firms often have investment minimums of $250,000 to $25,000,000, making it a rare asset class to directly invest in. Investors are often required to commit to a 5- to 10-year investment.
Indirect investments can be made in private companies. Investors have the option to earn downstream returns by investing in funds of funds or exchange-traded funds. These funds are composed of shares of private companies and are therefore subject to a number of management costs.
Next steps for you
An investment professional can help you navigate private equity investing. To explore your options, clients who have at least $5,000,000 invested in Personal Capital can schedule a live chat with a financial adviser to discuss their options.
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The author is not a client at Personal Capital Advisors Corporation. He is paid as a freelancer.
This blog post contains general information and is not intended to be legal, tax, or accounting advice. No compensation exceeding $500. For your particular situation, you should speak to a qualified tax or legal professional. Remember that investing comes with risk. Your investment's value will fluctuate over time. You may lose or gain money. Personal Capital Advisors Corporation is a subsidiary owned by Personal Capital. Any reference to advisory services means that Personal Capital Advisors Corporation is referring to them. Personal Capital Advisors Corporation (SEC) is an investment advisor registered with the Securities and Exchange Commission. Registering does not imply any specific skill or training, nor does it imply endorsement of the SEC.
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By: Tanza Loudenback, CFP®
Title: Public Equity vs. Private Equity: What’s the Difference?
Sourced From: www.personalcapital.com/blog/investing-markets/public-vs-private-equity-differences/
Published Date: Fri, 02 Sep 2022 15:00:00 +0000
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