If you've read the financial pages in recent months you will doubtless have seen plenty of articles about private equity. Investing in private companies used to be something only large pension funds or the ultra-rich would invest in. But it's increasingly becoming mainstream. As ROBIN POWELL explains in his latest article for rockwealth Cheltenham, private equity does have its attractions. But, for most investors, it simply isn't worth the risk or the expense.
As with the clothing industry, fashions in investing come and go, and right now private equity is all the rage.
It used to be only institutions and very wealthy individuals who invested in private equity, but it’s increasingly being sold to ordinary investors as well.
So what exactly is private equity investing? Essentially, it’s like buying a piece of a company that isn't publicly traded on the stock market. Private equity firms gather large sums of money to buy either a significant portion of a company or the whole business. They then work to improve the company's performance, with the goal of selling it later at a higher price. It’s not dissimilar buying a run-down semi at auction, doing it up and selling it for a profit.
Investors can reduce their risk by investing in a fund — usually an investment trust — that will typically include between five and ten different holdings.
But is it really worth it? Well, it certainly has its attractions, particularly as the number of publicly listed companies in the UK and other major developed economies has been steadily declining over the last two decades.
The challenge, however, as with investing any other type of asset, is identifying a fund, in advance, which is likely to deliver good returns in the future.
© The Evidence-Based Investor MMXXIV. All rights reserved. Unauthorised use and/ or duplication of this material without express and written permission is strictly prohibited.