A Guide to Private Equity Investing

Private equity investing means making an investment in securities through a negotiated process. Majority of these investments are in companies that are not listed on the stock exchange. While private equity investing can deliver impressive returns, it is more prone to risk than other forms of financing, such as debt.

If you’re planning to do some private equity investing of your own, consider the following:

• Determine the main goals for the overall portfolio.
• Decide the size of private equity allocation.
• Diversification is a vital aspect of any portfolio. It’s wise to maintain a healthy mix of target companies across geographies and industries.
• Remember that returns might be volatile in the short-term. Be prepared to stay invested for a reasonable time period, generally five to ten years.
• Returns from private equity investing can only be realized when the stakes are sold. Therefore, there must be easy options available for exiting the investment.
• Returns are always proportionate to risk. Make sure you don’t err in your judgment of the latter.

We already mentioned that private equity investing faces a range of risks that could be more severe than in other types of investments. Experienced investors can minimize some of the likely risks, but cannot eliminate them completely.

Environmental risk: Some countries suffer from a higher degree of political and economic instability, which is generally inimical to business. These countries are also likely to experience currency fluctuation and arbitrary changes in regulations. Again, emerging markets are notorious for their bureaucratic hurdles and associated corruption.

Certain countries have stringent or archaic corporate laws, which might make acquiring or divesting companies very difficult. You also need to watch out for accounting and disclosure norms, as well as any limitation of powers of foreign investors. All of these could severely impact your ability to exert influence as a key stakeholder. Also check for the availability of legal, accounting and banking support services.

In developed economies, there are many ways of realizing value from private equity investing, but that is not necessarily true of all countries. Before deciding on private equity investing, be sure to investigate the state of the capital markets and assure yourself that a proper exit mechanism exists.

Market risk: The management team of target companies will certainly present a rosy picture of their market and its future potential. Be sure to independently verify the data. Some sectors such as real estate are highly volatile, and investing all your resources in these businesses could prove disastrous.

Another element of risk that needs close examination is the quality of human resources. Often, entrepreneurs do not have prior working experience in professionally managed companies, which could affect their ability to manage the business. Remember that most smart private equity investors will never back a management team that doesn’t match up.
Due diligence is essential when embarking upon private equity investing. Books like “Venture Capital and Private Equity: A Casebook” could help you understand this subject better. So could programs offered.