Bauer Wealth Blog

What Are Private Equity Funds and How Do They Work?

Nov 29, 2019 4:20:00 PM / by Stephen Heitzmann

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Investors understand the importance of diversification. So naturally, many types of “pooled funds” exist. However, it’s critical to recognize that not all funds serve the same purpose. 

 

The more common types of funds (mutual funds and exchange-traded funds) have saturated the market with hundreds of pooled investing options to choose from. But these funds all focus on public-facing assets in open-trade markets. This makes many traditional funds vulnerable to the same risks (recessions, market bubbles, etc.) 

 

Meanwhile, Private Equity Funds focus on assets not available in public markets. Private Equity funds have been surging in popularity as investors seek alternative options to increase downside protection. 

 

What is a private equity fund?

A private equity fund is a pooled investment vehicle. It is very similar to a mutual/hedge fund, but with a few important distinctions. The adviser pools together the money invested in the fund and uses that money to make private equity investments on behalf of the fund. These private equity funds typically target assets very different from traditional mutual funds.

 

Another critical difference is considering your desired investment horizon. Private equity firms often target investment opportunities in assets that align with the goals of their investors of the fund. This increases the probability of finding an investment that is properly aligned with your goals and/or current situation. A private equity fund could be a better option for you if traditional assets and investing channels aren’t giving you the results you want.

 

Who can invest in Private Equity Funds?

A private equity fund is typically open only to accredited investors and qualified clients.  This could include institutional investors (endowments, pensions, insurance companies, universities, etc.) It could also be open to high income or high net worth individuals.  In most cases, the initial investment for a private equity fund is high. And/or it requires a long-term investment commitment with minimal liquidity. These conditions would not be ideal for an amateur investor. 

 

Even if you haven’t invested in a private equity fund directly, it’s likely you’ve indirectly contributed to one somehow. Many pension plans, insurance policies, and other large portfolios invest in private equity funds.

 

Important things to know about Private Equity Funds

Before getting invested in a Private Equity Fund, here are some important details you should know about how they work.

 

Increased control of the outcome

Many private equity firms acquire large stakes or majority control of the companies they invest in. This enables the firm to have more control of the final outcome and performance of their investment. While it would be virtually impossible to control the outcome of a generic mutual fund, Private Equity Funds offer the option for firms to have more control over results.

 

Increased conflict of interest

The benefit of increased control mentioned above often leads to conflicting interests within companies. This is a common dilemma when stakeholders have opposing goals or views of the company. 

 

For example, if a private equity firm recently bought a controlling stake of a video game studio… The firm’s goals may be to increase profits, capture market share and mainstream awareness. Meanwhile, the executives/developers from the studio may be more concerned with the artistic integrity and quality of their products.

 

It is important to ensure that companies and investment firms at least have similar goals or trajectories agreed upon.

 

The dynamic range of liquidity

Private equity funds typically have a longer investment horizon. This means your investment is often illiquid for several years. Returns typically aren’t realized for several years and you will have less control of how/when you can move your assets. 

 

Make sure you understand the flexibility and liquidity conditions of your investment when considering a private equity fund. If you have the ability to manage this illiquidity safely, private equity investments are an attractive investment option to consider

 

The dynamic range of investment horizons

One last thing to consider is aligning your investment horizon with the right private equity fund. Some private equity firms focus on startups and accelerators with the goal of realizing returns in 3-5 years. Other firms build industry-based long-term funds with an investment horizon of 10-20+ years.  Always ensure you can find a private equity fund that is aligned with your desired investment horizon.

 

How to invest in a Private Equity Fund

It is typically really difficult to discover private equity investments unless you know the party personally. Private Equity investment opportunities are often intentionally reserved to provide exclusivity to a few key stakeholders. 

 

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We build strong relationships with agents, companies, teams, and accelerators that need capital to optimize or grow their business. We analyze opportunities for risk, reward, culture, market potential, and dozens of other provable metrics. Then we share the most relevant and useful Private Equity offers with you. 

 

We believe in investing with an impact. Private equity is an effective way to leverage mindful investing in meaningful companies and opportunities.

 

Book a meeting today to see what Private Equity opportunities are currently available.

Topics: Private Equity

Stephen Heitzmann

Written by Stephen Heitzmann

Stephen Heitzmann is the CEO of Bauer Wealth Management, a Wealth Management Firm, based in Colorado Springs, CO. www.bauerwealthmanagement.com Bauer Wealth Management is a Registered Investment Advisor (CRD#: 152977/SEC#: 801-71090) with the Securities and Exchange Commission. This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.