How Do Private Equity Funds Work?

Private equity funding is a kind of investing that occurs privately, rather than publicly as on the stock exchange. Here, an investor puts in the capital with a private equity firm, the firm then manages that money into a company, and the investor receives a buyout on that in time. Expert advisors such as Ralph Thurman would say that private equity is not a short-term investment where money can be made that day, such as on the stock exchange.

In 2006, buyouts reached the $502 billion mark. By 2018, the global investment value was $2.5 trillion US dollars, with buyouts reaching $582 billion. To get a better idea of how private equity funding fuels an economy, learn more about how private equity investment works here.

How Does Private Equity Investing Work?

Private equity investing works in similar ways that public investing does. It is just done privately. First, investors provide capital to a private investment firm. Then, the advisors are allowed to manage that money and invest it into what is called a private equity fund. They will look for a company to invest in.

Generally speaking, the investors in private equity funding have to be a little more qualified than the average stock investor. There is some risk to private equity investments, but the return is higher.

In many cases, the private equity firm will buy a company completely. Sometimes they will buy out the original founder of the company. You probably heard of private equity buyouts more often than you know. Private equity funds won’t always use the funding of their existing investors. They will often borrow additional money called a leveraged buyout to purchase the assets of the company they are interested in.

The advantages of this model in the corporate world are that private equity funding saves a lot of companies that are floundering. Many companies will even rely on private equity firms to help them out when there is an economic downturn.

How to Qualify

There is usually a very large sum required to invest in private equity. It can be in the $1 million per investment range but it isn’t always. You may just need a net worth of $1 million dollars to qualify, but that could include equity you already have in a home or other properties. In some cases, an annual income is set to qualify. That could be an annual income of $200k or more.

There is a requirement with every firm because private equity firms are using your investment to buy out companies. Your money is then pooled with the million-dollar investments of others to purchase or help a company.

There Are Risks

As with every investment, there are risks. Private equity funding carries higher risks than the average investment. The payoff is larger as well. This is often a long-term investment where you could wait as long as 10 years for the payout.

That is often why investors put money in private equity, to begin with. You also are not guaranteed to make money. The private equity firm will make a commission either way, but you may not necessarily. This is why it is so important to research the firms you are dealing with or considering before putting money into a private equity firm.

Invest in Private Equity

Private equity firms and their advisors help investors every day find the long-term solutions they need to manage their assets. Learn more about the firms that do this for people, and begin the exciting process of investing in private equity.