Private equity contributes significant value to the broader economic market. Without VC funding (a form of private equity), for example, startups wouldn’t raise money. You wouldn’t have Facebook or Twitter without that infusion of private equity capital. Indeed, the amount of money in private equity is substantial.
Why, though, do investors brother with private equity? After all, according to historical data, the stock market (S&P500) had an average annual return of 13.6% per year for the last ten years. That’s a pretty good ROI. Private equity has some crucial advantages, though, that the stock market doesn’t.
Diversification
Do you ever hear something like, “company X reported a record $1 billion profit, and their stock is down $5 today?” The stock market is driven, at least in part, by sentiment. These investments are very liquid, but they aren’t always logical.
When you invest in private equity, quarterly earnings, investor sentiment, and seasonality have no bearing on the asset’s underlying value. If the private company invests in startup X, the only thing that will matter is whether it delivers. And if the company provides record profits, other investors will undoubtedly want a piece of it, raising its valuation.
In this sense, private equity represents much-needed diversification for high net worth individuals. Even when the markets have turbulent times, private equity may be immune.
Higher Prospective Capital Appreciation
Unfortunately, the stock market causes a shortsighted approach to corporate wealth building. The focus tends to be on making the numbers look suitable for the next quarterly report.
However, with private equity, there are no quarterly reports and such to file. Subsequently, there are no price fluctuations based on earnings one month to the next. This private equity aspect allows the investing company and the company to focus on long-term objectives with more capital appreciation.
Due Diligence Done By the Private Equity Firm
In part, because private equity investments can be more illiquid than those on the stock market, private equity firms tend to do significant due diligence. They’ll learn every detail about a company’s finances, corporate officers, and the markets in which it operates. For real estate-focused private equity, the same applies. The firm looks at key metrics, like IRR, market forecasts, etc. to ensure the investment is of high quality.
This due diligence leads to higher-quality investments. Instead of finding companies and doing that level of research on them, a private equity firm does that for you.
ROI That Can Exceed the Market
The ROI with a private equity company can exceed other investment avenues with the right due diligence and capital appreciation. Depending on how companies grow and real estate appreciates, private equity can earn returns that are not necessarily with the market. Consider the effects of COVID, for example. While the broader market may show weakness, the hand sanitizer company the private equity firm invested in may have tripled its valuation.
Please note that nothing is guaranteed, however, and any investment has the risk of loss.
Investing With a Private Equity Firm Has Significant Benefits
There are numerous benefits to investing in a private equity company. The most substantial is that it provides high net worth people with diversification opportunities.
If you’re interested in learning more about Mack Capital and the funds we offer, please contact us. We’d love to discuss your financial objectives with you.