How to Get Started With Private Equity Investing
If you’re looking for an alternative investment that gets you away from the publicly traded stock market, you might consider private equity investing. But what exactly is private equity investing, and how can you get started?
The Basics of Private Equity Investing
Let’s start with the basic premise behind private equity investing.
Essentially, you’re going to be investing in companies or organizations that aren’t available for public exchange. You can think of it like investing in individual company stocks — except you won’t be going through the stock market. In exchange for a specific amount of capital, you’ll be granted a specific amount of equity in the organization.
From there, you may be able to make decisions on behalf of the company, control certain aspects of the company, or you may just be a passive investor. You’ll also be entitled to money generated by the company; you’ll get a profit distribution at specified intervals, and if the business is sold, you’ll have claim to a percentage of the proceeds.
There are many different ways that you can invest in private equity. For example, you can venture out on your own and look for private deals via networking; when you meet new entrepreneurs or people connected to entrepreneurs, you can ask about investment opportunities available.
Alternatively, you can invest with a specific private equity firm or exchange traded funds (ETFs) that focus on private equity investments. Special purpose acquisition companies (SPACs) are also options.
The Advantages of Private Equity Investing
Why should you consider investing in private equity?
There are several advantages:
- Early-stage investment. For starters, you’ll have the opportunity to invest in potentially high-growth businesses at the earliest stages of development. You can review the business plan and investor booklets created by the entrepreneur in charge, conduct your own financial analysis, and attain an equity position long before your contemporaries get a chance to invest. There are a few benefits you’ll enjoy because of this. First, you’ll have a longer course of growth, meaning your investment will be able to multiply further overtime. Second, you’ll have less competition, so you can have a bigger equity stake.
- A high-risk, high-reward approach. Many private equity opportunities end up fizzling out, but some end up being astronomically successful. This is a high-risk, high-reward opportunity, and for some investors, that’s the ideal balance. With smart due diligence, you can tip the scales in your favor here.
- More total opportunities. If you only invest in publicly traded companies, you’re artificially limiting yourself. If you open yourself to both public and private investment opportunities, you’ll have more total opportunities to choose from, meaning you’ll be able to find better fits for your portfolio.
- Options for influence. Some people choose to get involved in private equity investing because they like the idea of exerting influence, providing guidance and helping to make major business decisions as the organization develops. Keep in mind this isn’t going to be true of all private equity investment opportunities; some entrepreneurs and business owners will want to retain control.
- Tax advantages. Private equity investing can also offer some interesting tax advantages. Be sure to talk to your financial advisor about the possibilities.
How to Get Started With Private Equity Investing
How can you get started with this strategy?
- Dig into the details. If you’re a total beginner, a single, simplified article on the topic isn’t enough information for you to start actively investing. It’s important to do your research, fully understand the potential risks and rewards, and arm yourself with information before you make any deals. Talk to other investors, talk to your lawyer, and fully investigate the possibilities for private equity investing before moving any further.
- Find a mentor or advisor. You can also look for a mentor or advisor to help guide you. Angel investors and venture capitalists often enjoy giving back, teaching young up-and-comers what they know about investing. You can shadow these people in the course of their daily responsibilities, ask insightful questions, and learn valuable lessons.
- Choose a path forward. As we said earlier, there are many different ways you can get involved in private equity investing. Not all of them are going to be a good fit for you. For example, you may not have the time necessary to look for individual deals on your own — so investing with a firm or with a SPAC may be preferable, especially to start.
Private equity investing isn’t a perfect strategy, and it’s not an ideal fit for every investor portfolio. However, it does offer some unique advantages over conventional stock market investing and other traditional investments. If you’re looking for a way to achieve higher growth or just diversify your portfolio more fully, it could be exactly what you need.
