Private Equity Risks

In this dynamic and volatile economic market, investors are increasingly interested in learning more about private equity: pros and cons. The successful investment firms of the past decade have taken advantage of asset acquisition and management and turned considerable dividends for their clients. Average professionals and avid investors alike have reached financial security in a matter of years with private equity firms. With the possibility of success in mind, it is important to have a more complete grasp of this type of investment if it is to become a part of a full financial portfolio.

Private Equity Defined

As an asset class to itself, private equity if the equity securities of companies that do not sell stock publicly in stock market exchanges such as the New York Stock Exchange (NYSE) or NASDAQ.

To be true, the company in question is an operational business. However, it’s either are already in default on business loans and other obligations, it may already be protected by bankruptcy, or they are quickly entering the red and are in need capital or outright buyout.

Understanding private equity: pros and cons, begins by knowing institutional investor firms are the primary purchasers. Next, it is important to comprehend the different forms of private equity acquisitions.

A leveraged buyout

Often, companies are not completely bought out. In fact, the best private equity acquisitions are established businesses with a well documented history in the marketplace.

Therefore, many companies that are entering financially difficult times merely require capital to become profitable once again. A leveraged buyout allows the business to remain operational; however controlling interest is acquired by the private equity firm in order to safeguard the risk with hard assets.

Growth Capital

In many cases, a mature company with a history of stable and recurring cash flows simply requires capital in order to grow the business into new markets. The capital could be used for product development which may require new technologies.

With growth capital, the private equity firm does not acquire controlling interest in the operations of the business. Yet, contracts typically include timeframes for profitability. Should the company not meet expectations, the private equity firm protects the investment with secured assets.

Distressed Securities

Equity securities with the greatest risk may also yield the greatest profits and dividends for investors. In the end, the best private equity firms over the past decade make the difficult choice of determining a company to not be profitable without extraordinary measures.

These forms of securities are called distressed. In these special situations, the investment firm has the final say in the direction of the company. Sometimes referred to as Distressed-to-control or loan-to-own strategies, these investments seek gain controlling interest of a company requiring corporate level restructuring.

Also common with distressed securities is rescue financing and turnaround strategies. However, the capital is leveraged against control of the company to reduce the risk of the investment.

Private Equity: Pros and Cons of Investing

In strictly real terms, private equity is an investment and therefore a risk. Even when the firm gains controlling interest in the assets and operations of a company, there is no certainty and no guarantee.

The Pro’s are as follows:

Private Equity investments have made real people millions of dollars in the past five years.

As part of a well diversified portfolio, any investment is worthy.

Investors could find themselves at the helm of a corporation.

The Cons are as follows:

Private Equity is a high risk investment. Money may be lost.

This type of investment is usually reserved for wealthy investors.

This investment could take years materialize.