If you are looking for a way to invest your money and enjoy optimal returns, a private equity investment fund may be the thing for you. However, there are several things you should consider before moving forward. Read on to find out what you should know before you invest in private equity investment funds.
Many independent investors start trading on the stock market with only a few thousand dollars. However, private equity investment funds resemble highly exclusive clubs in that they generally require a hefty minimum investment – usually in the six-digit range. If you do not have at least a quarter of a million dollars to risk in private equity investment, this may not even be an option for you.
Every investment opportunity comes with a certain level of risk. However, some are riskier than others. Private equity funds in particular tend to face a relatively high level of risk compared to collective investment schemes that invest in publicly traded companies. There are various reasons for this. First, private investment funds often engage in venture capital – or the financing of new companies. While investment into such companies can bring massive returns – especially in the case of technology-related firms – the failure rate for new companies is high as well. When a company in which a private equity fund has invested goes under, the fund loses that investment. Another instance in which such funds often face high risk is when they intentionally purchase companies that are failing. Such companies often have very valuable assets and hold a market share that can be quickly turned into profits – if significant changes can be made to cut costs and streamline operations. However, such efforts are not always successful.
Private equity investment funds often get a lot of bad press. One reason for this is that, in buying and restructuring failing companies, private equity investment funds frequently fire people. Advocates of private equity investment say that firing some people so that a failing company can survive is always better than simply letting the company continue on its course toward self-destruction. However, critics do not necessarily see it this way. They feel that such firing often does little more than cut short-term costs to essentially paint the grass green so that the company can be quickly resold. They say that, as time passes, such companies tend to face problems because many of the people who are let go were actually part of the company's essential operations. As a result, various politicians and activists have referred to private equity funds as being full of "vulture capitalists" who essentially make a fortune by preying on the weak. Much of the criticism of private equity investment funds also lies in the fact that they disrupt stable long-term relationships between management and workers. This is because, as a rule, private equity investment funds tend to only make short-term investments into companies. In so doing, they may actually decrease the value of the company instead of doing the opposite. Again, critics often feel that such funds make hefty profits in return for creating communities full of unemployed people.
One of the advantages of pooling assets into private equity firms is to allow investors to share the maximized benefits of professional investment management. Various investment management firms specialize in managing the assets of private equity investment funds. However, investors should bear in mind that such professional management does come at a cost. An example of a fee structure might be an annual fee of 2 percent of the total amount of capital invested plus 20 percent of all profits earned. While such professional management can certainly pay off when it is effective, there are no guarantees.
For prospective investors, there are various alternatives to private equity investment funds. You could put money toward some other type of collective investment scheme such as a mutual fund or a hedge fund. You could also hire a wealth management firm, financial advisor or broker to help you make investments that are safer and more stable. However, this is not to suggest that there is anything intrinsically wrong with private equity investment funds. Managed correctly, they can bring high rates of return for investors while providing a valuable resource allocation service for society.
The bottom line is that you should not invest in a private equity investment fund until you have carefully weighted the pros and cons of such and investment. Doing your homework ahead of time could help you to avoid losing a lot of money down the road.