The Basics of Investing in Private Equity Funds

Stocks and bonds are typically the first instruments that come to mind when investing. But they aren’t your only opportunity. If you’re here, it means you’re considering investing in private equity funds. 

No surprise there. Private equity funds have become a popular choice for investors seeking to diversify their portfolios and access potentially lucrative opportunities. 

However, if you’re seriously thinking about taking this alternative investment route, it would be a good idea to first learn at least the basics of private equity fund investment. 

This article will guide you through the essentials, benefits, and challenges, along with how to get started. So sit back, make yourself a cup of coffee, and let’s get to work. 

What Are Private Equity Funds?

Private equity (PE) funds pool money from investors to buy stakes in private companies or take public companies private. These funds are managed by private equity firms, which use their expertise to enhance the value of these companies before selling them at a profit.

Unlike publicly traded assets, private equity investments are typically illiquid and have longer time horizons, often spanning 7 to 10 years. This allows fund managers to make strategic improvements to their portfolio companies without the pressure of short-term market fluctuations.

Who Can Invest in Private Equity?

Traditionally, private equity funds were accessible only to institutional investors, such as pension funds, insurance companies, and high-net-worth individuals. 

That’s no longer the case. Recent developments have made PE funds much more accessible. Nowadays, retail investors like yourself can start investing in private equity funds through funds-of-funds or investment platforms. 

Types of Private Equity Funds

Private equity funds are diverse, catering to various strategies and investment goals. 

Each type of fund focuses on a specific stage of a company’s lifecycle or a unique market opportunity. Understanding these types is vital for finding the right investment. Let’s examine the most common types of private equity funds.

Venture Capital (VC) Funds

Venture capital funds are designed to invest in early-stage companies with significant growth potential. These companies are often startups or young businesses in emerging industries such as technology, healthcare, fintech, or renewable energy.

VC funds are considered high-risk due to the likelihood of business failure at the startup phase. Of course, with higher risk comes a greater potential reward. 

Growth Equity Funds

Growth equity funds target established businesses that are generating revenue but need capital to expand their operations, enter new markets, or finance significant initiatives.

Investors typically take a minority stake, allowing the existing management to retain control while benefitting from the capital and strategic input. 

Naturally, since you’re investing in established entities, the risk is much more moderate compared to venture capital, as the companies have a track record. Of course, the risk is still there as their growth plans may still face uncertainties. 

Buyout Funds

Buyout funds focus on acquiring controlling stakes in mature businesses, often through leveraged buyouts (LBOs). The fund takes a hands-on role in restructuring the company to optimise profitability and prepare for an exit strategy, such as a sale or IPO.

These funds can generate high returns, but the use of leverage increases financial risk if the company underperforms.

Private Equity Funds Opportunities & Risks

So yes, private equity funds present a unique investment route with a range of potential strategies to suit different goals and risk levels. 

Private equity can be a powerful avenue for investors seeking long-term growth and diversification. However, like any other investment, private equity funds also have risks and potential downsides you, as a savvy investor, ought to consider. 

PE Opportunities

Let’s start with the good. Here are some of the most recognised benefits associated with private equity funds:

• Higher Returns. Private equity has a long-term track record of outperforming traditional asset classes, such as stocks and bonds. This makes it an appealing option for investors who want to maximise their capital returns.

• Diversification. Private equity investments often have a low correlation with public market performance, allowing investors to diversify their portfolios and reduce exposure to market volatility.

• Access to High-Growth Companies. Private equity investing provides access to companies typically unavailable in public markets, including startups and niche industries. These opportunities can offer significant upside potential.

• Active Value Creation. Private equity firms actively participate in their portfolio companies, implementing operational improvements, strategic changes, and financial restructuring to enhance business value. This hands-on approach can lead to significant gains upon exit.

Common Risks

What about the potential risks? There are several to keep in mind:

• Illiquidity. Private equity investments typically require a long-term commitment, often tying up capital for 7 to 10 years. This means that, unlike publicly traded securities, private equity lacks a liquid secondary market.

• High Minimum Investment Requirements. Entry into private equity funds typically requires substantial capital, with minimum investments often starting at 100,000 EUR or more. This makes them less accessible to smaller investors.

• Complexity and Lack of Transparency. Private equity structures can be complex, and detailed performance data may not always be readily available. This lack of transparency can make it challenging for investors to fully understand the risks and opportunities.

• Risk of Loss. As with any investment, private equity does not guarantee success. Some portfolio companies may underperform or fail, resulting in a partial or total loss of invested capital.

Private Equity Opportunities & Risks at a Glance

Okay, let’s summarise what we’ve learned:

Who Are Private Equity Funds For?

It’s fair to say that private equity funds are not for every investor. They cater to a very specific audience with certain financial goals, risk tolerance, and investment capabilities. 

Here’s a breakdown of who is best suited for this type of investment:

• High-Net-Worth Individuals and Accredited Investors
  Private equity funds often have high minimum investment thresholds, ranging from 100,000 to even several million euros. This makes them accessible primarily to high-net-worth individuals (HNWIs) or those meeting accredited investor criteria.

• Institutional Investors
  Pension funds, insurance companies, university endowments, and sovereign wealth funds are significant players in the private equity space.

• Long-Term Investors
  Given their long-term investment horizon, private equity funds are very popular among investors who plan for retirement or want to build legacy wealth. 

• Experienced Investors
  Private equity investments require a deep understanding of financial markets, business fundamentals, and risk assessment. They are best suited for those with prior investment experience or the support of professional advisors.

If you fit any of these criteria, then private equity funds can be the right choice for your portfolio. In that case, you can get right to the next section, where we’ll provide you with steps you need to take to start investing in private equity. 

If you don’t, you can skip the next section and proceed to the one below it, where we’ll present an interesting alternative to private equity funds.

How to Start Investing in Private Equity Funds

Whether you stand firm in your decision to invest in private equity funds or are just curious to learn more about them, here’s a quick overview of how to start investing:

Step 1: Evaluate Your Financial Goals and Risk Tolerance

Since private equity is a long-term and illiquid investment, it’s essential to assess your personal financial situation before committing. 

Start by determining your goals. Are you looking for significant capital appreciation, diversification, or exposure to high-growth companies? Private equity aligns well with long-term objectives, such as retirement planning or wealth building over decades.

With goals set, assess your risk tolerance. Private equity can carry substantial risks, including potential losses and illiquidity. Ensure you are comfortable with these factors and have other liquid assets in your portfolio for emergencies or short-term needs.

Finally, evaluate your current financial position. Can you afford to lock up a significant portion of your capital for 7 to 10 years? 

Step 2: Research Fund Managers and Strategies

The fund manager you choose plays a crucial role in your investment’s performance and potential success. But how to pick the right one? 

Well, for starters, keep in mind that there are no bulletproof fund managers. Still, there are some good practices to follow when looking for the best possible option.

First and foremost, consider the reputation and track record. Choose funds managed by reputable private equity firms with a history of delivering strong returns. Look for firms with expertise in specific industries or strategies that align with your interests.

Analysing past performance is also a good idea. While it does not guarantee future results, it provides insight into the fund manager’s capabilities. Evaluate their historical returns, exit strategies, and ability to weather market fluctuations.

Make sure the fund provides clear information about its strategy, portfolio composition, and reporting practices, too. 

Step 3: Understand the Fees

Private equity funds often come with significant fees, which can impact your overall returns. In most cases, you’ll have to pay: 

• Management Fees: Most funds charge an annual management fee, typically around 2% of the committed capital. This fee covers the costs of operating the fund.

• Performance Fees (Carry): In addition to management fees, private equity funds often charge performance fees, usually 20% of the profits earned above a certain threshold (the “hurdle rate”).

These fees can significantly affect net returns, so be sure you carefully review the fee structure and ensure that the potential gains justify the costs.

Is There an Alternative?

As promised, we have an alternative for investors interested in alternative assets but hesitant about the complexity, high entry barriers, and long lock-up periods associated with private equity funds. That alternative is our very own Splint Invest. 

Through our platform, you can own a share of our carefully curated investment funds, from fine wine and rare cars to collectable whisky, art, and even LEGO sets.

We believe that everyone should have the opportunity to invest in the world’s most exclusive and tangible assets. That’s why we’ve created a platform that’s easy to use, accessible, and designed to help you build a diversified portfolio with investments you’re truly passionate about.

Splint Invest vs Private Equity

Here’s why Splint Invest is an exceptional alternative to private equity funds:

• Low Minimum Investments. With entry points starting at just 50 EUR, we’ve opened up the world of alternative investing to everyone, whether you’re a seasoned investor or just starting your journey.

• Diversification Like Never Before. Invest in tangible assets that are largely uncorrelated to the stock market. By diversifying into fine wine, art, or rare cars, you can balance your portfolio and reduce market-driven risks.

• Shorter Investment Horizons. Many of our assets, such as whisky or LEGO sets, offer shorter maturation periods compared to the 7-10-year lock-up typical of private equity funds. This means you can see returns sooner while still enjoying long-term growth opportunities.

• Emotional Connection. Investing with Splint Invest isn’t just about returns but also about passion. Imagine owning a share of a classic Ferrari or a cask of rare whisky. You’re not just building wealth – you’re investing in assets with history and prestige.

• Ease of Use. Our intuitive platform makes exploring, investing, and managing your alternative assets seamless. No jargon, no confusion – just straightforward investing with a touch of professional advice from our experts. 

Sounds like something you’d like to try? Create your investor account and start your journey with alternative investments today. 

The Bottom Line

While private equity funds focus on long-term investments in private businesses, Splint Invest offers a refreshing alternative for those seeking a more flexible and accessible way to diversify into alternative assets. 

Instead of committing large sums for years, Splint Invest lets you invest fractionally in tangible, passion-driven assets like fine wine, whisky, trading cards, LEGO, and more. 

With lower entry barriers, shorter horizons, and greater liquidity through its secondary market, Splint Invest is a modern solution for investors who want the benefits of private equity-style diversification without the complexity or long-term lock-in. 

It’s alternative investing made simple.