- Private equity funds give investors access to a diversified portfolio of private companies that managers believe have superior growth potential
- These can range from promising startups to established companies
- Examples of private equity funds include buyout funds, growth equity funds, and venture capital funds
What are private equity funds?
Private equity funds give investors access to a diversified portfolio of private companies that fund managers believe have superior growth potential. These can range from promising startups to established companies. Sub-types of private equity funds include buyout funds, growth equity funds, and venture capital funds.
There are a range of different types of private equity strategies. Each has different return-generating potential and risk-return profiles. But all of them aim to deliver returns that are superior to those available from publicly listed companies
What Types of Private Equity Funds Are There?
Private equity fund strategies include the following:
- Growth Equity – Growth equity managers invest in private companies that are still going through a rapid business expansion phase, and that they believe have excellent growth prospects. They usually take minority stakes in these companies.
- Venture capital – Investments are made into early-stage companies like startups with a higher risk-reward ratio than the other types of private equity investments because the companies haven't yet built up a performance track record.
- Buyout – Buyout funds buy controlling stakes of an investee company and often exercise control over the investee company’s assets and operations. Such funds usually invest in established companies with an operating track record and generate returns by working with their investee companies to improve the companies’ profitability and optimize the companies’ capital structure, for example, and thereby increase the value of their investments.
What Are the Advantages of Private Equity Funds?
- Superior Historical Performance - Private equity investments have historically offered higher rates of return than investments in publicly listed companies and other traditional asset classes. Over the past ten years, for example, global private equity yielded an average annual return of 14.2% versus global public equities at 10.0%, according to Cambridge Associates. Early-stage venture capital generated even higher returns of 16.3% versus the S&P 500 at 14.0% over the same period.
- More Untapped Opportunities - Private equity managers have more opportunities to find companies that offer substantial upside potential. On the New York Stock Exchange, Singapore Exchange, and other public equity markets, companies are extensively analysed and followed by a wide variety of players, and updates on the companies’ financial and operating performance are readily available, making it difficult for managers to generate outperformance. Private companies are less analysed and followed, and private equity managers can rely on their networks and expertise to determine what potential a private company has to offer. Private equity managers can also work directly with their investee companies to improve profitability and optimize their capital structure, for example, and thereby increase the value of their investments.
- Diversification – As with mutual funds, private funds typically spread investor’s pooled money across multiple companies, often ones with different potential returns and risk profiles, in order to ensure one bad investment doesn't spoil the entire basket.
- Investment Expertise – Via the fund’s manager, you can get access to specialist investment experience and knowledge needed to identify investment opportunities in different types of private companies. Each of these requires deep knowledge of the drivers of returns and potential risks in securities that are not publicly traded. Private equity managers also typically work with their investee companies to improve their operating and financial performance.
What Are the Disadvantages?
- Transparency – Private equity funds are not subject to the same regulatory reporting requirements as publicly listed assets. Thus, it is more difficult to gather reliable information about them.
- Higher Risk: Investing in private equity typically carries higher risks than investing in publicly listed companies. For example, investee companies of buyout funds may take on a higher level of debt to increase equity returns, while venture capital funds invest in start-up companies which are less mature and have a higher failure rate. While the diversified nature of a fund does spread that risk out over portfolio of investments, private equity funds are inherently more risky than public equity mutual funds.
- Liquidity - Traditionally, private equity investments have been illiquid, with investors locked in for anywhere from three to ten years and with little to no chance of selling their stake in the fund. Investors on ADDX, however, have access to our in-house securities exchange.
- High Fees – Fees for private equity funds are typically higher than those charged for public market equity funds. If the funds perform well, however, investors will still enjoy high returns net of fees.
- Access – Minimum investments amounts into private equity funds traditionally range into millions of dollars, putting them out of reach to most investors. ADDX are now making the asset far more accessible to accredited investors.
Who Can Invest In Private Equity Investments?
Private equity funds traditionally cost million of dollars to buy into, making them inaccessible to all but institutional investors and the extremely wealthy. ADDX, however, democratizes private equity investing by making it available to investors for as little as S$10,000 to invest in primary offerings and as little as S$100 to trade.
To qualify as an ADDX investor, investors need to meet one or more of the following conditions:
•Yearly income of at least S$300,000 or
•Net financial assets of at least S$1,000,000 or
•Net total assets of at least S$2,000,000
The Bottom Line
Private equity funds give investors access to a diversified portfolio of private companies that fund managers believe have superior growth potential. Examples of private equity funds include buyout funds, growth equity funds, and venture capital funds.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.