Pros and Cons of Private Equity Investing | Granite Harbor Advisors (2024)

FAQs

What are the pros and cons of private investments? ›

Investing in Private Markets: Evaluating the Pros and Cons

The potential for higher returns, access to unique investment opportunities, and flexibility and customization are appealing aspects. However, it is crucial to acknowledge the drawbacks of illiquidity, higher risk, volatility, and limited transparency.

Diversification: Private equity investments can benefit a portfolio as they are typically not correlated with traditional investments. By adding private equity to a portfolio, investors can reduce their overall portfolio risk and potentially enhance returns.

Private equity investing often have high investment minimums, which can magnify gains but also magnify losses. Liquidity risk exists since private equity investors are expected to invest their funds with the firm for several years on average.

Yes, but not directly or via most PE funds. Not only are the minimum investment amounts prohibitive, but you must meet lofty wealth requirements (e.g., net worth, investment assets) set by government regulators.

Private equity firms are usually smaller and more selective about their employees. But once a hire is made, they care less about how performance is maintained. There are exceptions and overlaps in every industry but, in general, the average day is a bit less stressful for private equity associates.

If your business is struggling, the PE relationship could ensure you get far more value than you would have alone due to the PE firms' fresh outlook, ability to roll up your firm with complementary businesses, and experienced managers.

Lack of Investor Liquidity: Private company shares are typically illiquid, unlike companies with public shares that can be bought and sold on the stock market. This means these shares cannot be easily converted into cash. This lack of a reliable exit strategy for investors can impact their investment attractiveness.

The best way to minimise your risk as an investor is to understand as much as possible about the company before you invest. This is normally done through a formal due diligence process. Usually performed after signing a non-binding terms sheet, due diligence involves a deeper investigation into the company's affairs.

Historical performance of private equity

Since the end of the year 2000, the global private equity index as measured by Preqin has delivered an annualized return of 10.5%, while a global public equity portfolio produced 7.0%, resulting in an average annual return premium of about 3.5%.

Since private equity funds have far more control in the companies that they invest in, they can make more active decisions to react to market cycles, whether approaching a boom period or a recession. The result is that private equity funds are more likely to weather downturns.

What is the success rate of private equity investments? ›

Key Takeaways. Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. From 2000 to 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.

Private equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it's managed. In compensation for these terms, investors should expect a high rate of return.

Sector focus

Portfolio companies of private equity and venture capital firms accounted for more than 16% of all US bankruptcy filings in 2023, their largest share of the annual bankruptcy rate going back to at least 2010, Market Intelligence data shows.

Hedge funds and Private equity funds also differ significantly in terms of the level of risk. Both offset their high-risk investments with safer investments, but hedge funds tend to be riskier as they focus on earning high returns on short time frame investments.

Private equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it's managed. In compensation for these terms, investors should expect a high rate of return.

The Pros and Cons of Pursuing a Career in Private Equity

However, private equity professionals can experience long work hours, high stress levels, and a lack of work-life balance. Another potential downside of pursuing a career in private equity is the highly competitive nature of the industry.

Cons of Private Funding

Potential for conflicts of interest: Private funding sources may have their own interests or agendas, which could impact decision-making or the direction of the funded project.

In many ways, private equity funds carry more risk than public equities due to the leverage, lack of liquidity, and very long lockup periods associated with such holdings.