If you’re looking at investing with a private equity company, you might be wondering where their investments are. In other words, what, precisely, are the types of investments that private equity firms make?
It’s worth noting that no two private equity companies are the same. As the name implies, these firms have quite a bit of discretion regarding investment categories and objectives. So no two companies will invest in quite the same classes of assets.
With that said, there are some general assets in which private equity companies will usually invest.
Private Companies
Private equity will usually invest in private corporations. Venture capital is a well-known type of private equity firm. These firms search for startups and promising young companies to make a crucial investment that will enable them to scale up and become a disruptive force in the market.
However, many private equity companies won’t invest in the VC space. Instead, what they’ll do is identify a company that could be a market leader in their area but is being held back. Maybe the company has way too much debt at too high of an interest rate. Or, perhaps, they keep running into cash flow problems. Once the firm identifies a company like this, they seek to make a substantial investment to alleviate these financial woes that the business feels and free them to be the market leaders they should be!
Most of the time, the equity firms will also work with the companies in which they’ve invested to provide them with the necessary guidance and support to be successful. To that extent, private equity can sometimes act like a partner with these investments more than a hands-off relationship.
Leveraged Buyouts
A leveraged buyout is another typical investment that many private equity companies make. The firm makes an offer to buy a company. Instead of paying for it with its money, only a small fraction is cash from the private equity firm itself. Most of the payment is via debt financing. The collateral for this debt is the target’s assets and operations, not those of the private equity firm or investors.
Using leverage, private equity companies can achieve much higher ROIs than if they acquired the target using all investors’ money.
Real Estate
Many private equity firms also have investments in the area of real estate. There are firms dedicated solely to real estate and will often invest in significant commercial or apartment buildings. The rent is one source of income on these investments. However, there’s also a substantial prospect of capital appreciation as these buildings become more valuable.
Private Equity Firms Invest in a Wide Variety of Assets
Of course, the three investments are by no means an exhaustive list. Private equity firms can invest in everything from options to real estate. It all depends on the company itself and what type of investments they offer.
If you’re interested in exploring alternative investments, please contact us at Mack Capital. We’d love to learn more about your objectives and see what investment opportunities we have that would suit your needs.