top of page

Should Your Portfolio Include Private Equity Investments?

Historically, private equity is considered a niche industry. Investors tend to be either wealthy individuals or a group pooling their resources—however, the type of private equity investors that are out there is changing. 

As market trends change, doors are opening for large and small investors looking to add private equity to their portfolios. While this can be good news for smaller investors, this doesn’t necessarily mean you want to run out and add private equity to your list of assets.

Private equity investments are still risky, meaning they’re typically not the best option for nervous investors. With that being said, there can be advantages to private equity investing. Whether it’s the right financial move for you depends on your goals and nerves.

Potential Advantages of Private Equity

Yes, private equity can be a risky investment. There’s no guarantee the purchased company will ever sell for more than its purchasing price, and there’s also the negative reaction private equity firms tend to generate. 

Since the goal is to increase the company’s profits in only a few short years, drastic cuts like employee layoffs are common. Sometimes, you need to consider how private equity affects other individuals’ lives before deciding if it’s the right addition to your portfolio. If you are considering private equity as an investment opportunity, chances are you’re at least okay with these and other cost-cutting business practices. 

Even though you need to be aware of the potential downsides associated with private equity, this doesn’t change the fact it can result in a significant payout. So, let’s take a closer look at some of the reasons why you may want to invest in private equity.

Increased Control and Information

With the stock market, you don’t have a lot of control. After all, you’re in it with millions of other investors and you can’t control when they decide to buy or sell. You also have little to no control over the company’s actions. Your stock may be soaring one day and tumbling the next all because of a negative headline or CEO’s actions.

Private equity is different—you are a primary investor, even if you’re pooling your resources with a group. You have more of a say in the direction a company goes. This also means you have greater access to the business’s information. Sometimes, this can be enough to settle your nerves at least a little.

Flexible Entry and Exit

You can buy and sell stocks pretty much any time the market’s open—yes, the public investment market is flexible but this doesn’t always translate into earnings. For example, if you choose the wrong time to sell stocks you may be hit with a loss instead of a profit. This isn’t why you get into investing.

Private equity firms spend a lot of time researching a company before making an offer to buy, and the private equity manager has a plan on how to help ensure the business makes a profit for investors. When it’s time to sell, this is when you really notice and appreciate private equity’s flexibility. You have multiple selling options and this typically means being able to choose which one offers the most profitability.

A private equity firm can choose to sell to another private equity fund, an IPO, or go with a trade sale. With stocks and other types of investments, you’re limited on how and to whom you can sell.

Clear Opportunities

When a company goes public, pretty much anyone can go out and purchase stock. However, have you ever noticed that companies just starting out or are in transitional industries are rarely publicly traded? There’s a good reason you rarely find these types of companies listed on any of the traditional stock exchanges. They simply can’t provide the steady increase in earnings investors look for.

Private equity addresses this and other potential issues a little differently—remember, the keyword is private and not public. Since a smaller group of investors is involved, it’s easier for companies to address issues and meet growth expectations. In a nutshell, companies have a little more time to reach their full potential in the private market compared to the public one.

Investing in Private Equity

To sum everything up, private equity can be risky and the industry has plenty of detractors. However, if you’re willing to wait a few years the payoff on your investment can be huge. 

Private equity investing isn’t for everyone, and it shouldn’t comprise a major portion of your portfolio. But it can fill in some gaps you may have in your investments.

Fuel Your Startup Journey - Subscribe to Our Weekly Newsletter!

Thanks for submitting!

bottom of page