May 15, 2022

What is “private equity”?

Private equity attracts a growing number of investors every year. This asset class attracts with its increased accessibility, high yields and tax advantages. Yet while the rewards are attractive, investing is not without risk.

What is “private equity”? – iStock-ra2studio

Invest in unlisted companies

Private equity or “private equity” refers to a form of investment through which an investor devotes part of his capital to the development of an unlisted company. Popular with institutional and retail investors, private equity would offer a high return compared to traditional asset classes and protect investors from market fluctuations, as the targeted companies are not listed.

Specialized funds

Concretely, investors buy units previously acquired by specialized funds which invest in the equity of companies. Private equity funds take minority or majority stakes, kept between 3 and 8 years before sale a? other investors. The value of operations is created by the growth of businesses. Long reserved for institutional investors, investments in private equity funds tend to be open to individual investors. The latter can now acquire units via a securities account, a PEA or even life insurance.

Different heritage strategies

There are four kinds of private equity. The first, “venture capital”, refers to an investment in a business being created. It can take the form of “seed capital” if the investment is made while the company is in the project phase, of “creation capital” or “innovation capital”, which corresponds to an investment. carried out at the launch of the company’s activity. “Development capital” corresponds to an investment made within a company that wishes to increase its production capacities and develop its activity. “Buyout capital” is an investment that facilitates the buyout of one profitable business by another through financial techniques based on borrowing and leverage. Finally, “turnaround capital” refers to an investment in a company that is facing difficulties. The investment finances the restructuring of the company to get it back on track. The reorganization phase of the structure and the activity can be supervised by the private equity fund.

A risky investment?

Private equity carries its share of risks insofar as the value of the investment is intrinsically linked to the growth and development of the companies financed. If companies do not keep their promises of growth, the valuation of unlisted securities is indeed likely to drop before being sold to another investor. Apart from hybrid products, which have their specific temporalities, this type of investment generally involves the immobilization of capital over the long term (up to 8 years). The liquidation of the fund can only take place once the disinvestment phase has been completed. At this time, investors recover their stake and any capital gains. Investing capital in a private equity fund is not without risk. Before taking the plunge, it is particularly recommended to read the KIID (Key Investor Information Document) to identify its characteristics and identify the level of costs that could reduce the profitability of the investment.