Investing is one of those ways of generating a good amount of income that can make your life a lot easy in the future.
People are trying to invest in Private Companies before they get public, in order to make a good amount of money whenever they are listed on IPO. There is a valid reason for people wanting to invest in Private Equity as Private Equity Investments really make your investment return boom after some years.
I am gonna tell you about how to invest in private equity in a simple manner. So, let’s dive deep into the process and everything about private equity.
1. What is Private Equity?
In short private equity funds raise money from outside investors and with the money, they acquire companies and then they look to take a hands-on approach to improve their business and then hopefully in five to ten years’ time they’ll be able to resell it for a profit.
Now the reason it’s called private equity is that these funds invest in private companies sometimes. They do invest in public companies but the goal is to take them back to private. Now if you don’t know the difference between a private company and a public company a public one is one that trades in the financial market so that means that anybody can buy it.
Say, I can go to my broker and buy apple shares for instance because it’s a public company, on the other hand, the private one is usually just owned by the founders the management team, and maybe a couple of early investors so it’s not open to the public. Taking a macro view when looking at the different asset classes private equity falls into the alternative investments category such the same bucket as hedge funds, real estate, and so on.
So, this isn’t really an area that normal people invest their money in instead it’s usually just industry professionals so some of the big investors usually include pension funds, sovereign funds, endowments as well as high net worth individuals. In terms of risk levels private equity is regarded as quite risky and that’s also why investors expect a high return for that. Now the reason is risky is because when you’re trying to transform a whole business so there are many variables to it it might not work out and so on.
And at the same time, it’s regarded as an illiquid investment so liquidity is basically a measure of how easily something can be converted into cash. Now a liquid is at the bad end of the scale say so it takes a long time to convert other liquid assets are real estate for instance where there’s a lot of paperwork and a lot of contracts required for you or anyone to be able to sell their real estate. While on the other hand on the very liquid side, there’s something like shares of apple stock for instance where everyone is buying and selling, so it’s very easy for you to convert into cash.
So, private equity is seen as an illiquid investment mainly because you’re investing in projects that last five to ten years and you can’t cash out before that. Now you may be aware that private equity sometimes gets a bad reputation so let’s look into why that is there are primarily two main reasons firstly it has to do with the actual transformation or maximizing a business right and that often involves cutting costs and among the biggest costs out there are salaries so employees in this case so that means that they have to lay off a lot of employees often and that’s something that gives them a bad reputation.
At the same time, there’s another reason and it’s that they’re usually in there for five to ten years trying to maximize their returns so they’re not really interested in whatever happens after five to ten years because they don’t really have any money to be made there right so that means that they can sometimes be overly aggressive.
2. How to Invest in Private Equity?
There are many companies whose products or services are sold in the market but still, we cannot invest in them directly because they have not been listen out on IPO.
Discord TikTok, open c, and onlyfans.com are all private companies but actually, you can invest in them by investing in private equity.
2.1 What You Will Really Buy?
If there are several founding shareholders in the company, the shares are divided among the shareholders according to the agreements. In a startup, there is usually not enough money, so it is difficult to offer high salaries to specialists.
Still, you can impress new recruits with tremendous trading prospects and offer stocks that are worth next to nothing now but could be worth millions or tens of millions of dollars in the future. In this way, employees also become stakeholders.
But that’s not all as the startup grows, it needs money than the startup issues additional shares and gives them to venture capital funds getting money for development in return. In December 2002 SpaceX did just that the founder’s fund gave them 12 million dollars and got more than 50 percent of shares, yes 50 of the shares I was shocked too.
Companies can do this many times for example SpaceX has done this around 15 times in funding rounds, and they have 65 investment funds on board.
2.2 Who has Got Those Shares?
Now, the shares of the adult private company may be held by a large number of people or organizations.
Founders, employees, and investment funds are all free to manage them as they want, that is to sell them to you or me, of course, if we offer a good price. It’s important to understand that we are not always dealing with the same stocks as in the case of the stock exchange.
But we have a whole list of possible instruments common stocks, preferred stocks, stock options, equity forwards, shares of the funds that have invested in stocks, or shares of the funds that invest in other funds that have invested in stocks, it doesn’t matter.
There can be quite a difference in these instruments in various company scenarios but at the end of the day if the company does well and goes public the owner of any of these instruments has shares that they can sell at a higher price.
2.3 Where Do We Buy?
There is a problem, I can’t give you a link to the website where all the publicly traded stock sellers hang out I might do this in the case of publicly traded companies like Apple or Tesla. There are no such places for the private market.
A number of people have stocks, and some people know people who have stocks, but some people know many people who hold many different stocks of private companies in their portfolios. So, those who are systematically invested in private companies have to build up a huge network of such contacts and constantly keep in touch about the availability of good stock offering tasks at good prices.
Keep in touch with 65 funds for example which invested in SpaceX that’s exactly what happens you have a thousand contacts on LinkedIn or Messenger. You can call and tag them around every day to see if anyone is selling stocks for five hundred dollars or maybe wants to buy them for eight hundred dollars. It is for those who are accredited investors and have a lot of funds.
You can look out for a private equity firm that can help you in investing in private equity.
According to the data collected this way plus open source information about the deals an idea of a fair price is formed, once the seller has been found and the price has been negotiated there is only one thing left, the size of the deal.
Typically these deals involved millions of dollars. If you have 100 million, it’s easy to shake hands and send 10 million dollars to the seller’s account.
2.4 How Exactly Can We Invest?
And it’s time to talk about how exactly the purchase happens.
The answer is simple you have to chip in with your friends to raise the necessary amount of money a million or a few million dollars and there is a great structure for this it’s called an SPV a single-purpose vehicle.
It’s a kind of investment fund that is created as an ordinary legal structure, did the single purpose of buying shares to a private company and making money on it. Anyone can create such a fund.
To do this you can use the services of the administrator to simplify a lot of steps. Whoever sets up an SPV shouldn’t just worry about buying shares.
Wait for the company to go public, sell the funds shares, and distribute the money to the fund’s investors.
This was all about the business credit score. Make sure to maintain a good business credit score to make your business grow more, and keep a check on your business credit file every month. A good business credit score can open up many opportunities and can help you literally grow your business from 0 to 1. You can also refer to someone else business credit report may be your competitor and have fair competition ahead.
If you have an insight if the investment is an asset then check this out for sure.
Frequently Asked Questions
Some of the most asked questions about private equity investments are listed below:-
Q1 Can a Person Invest in Private Equity?
Yes, a person can invest in private equity but the person has to be an accredited investor or qualified client which includes institutional investors and many more.
Q2 What is The Minimum to Invest in Private Equity?
The minimum investment in private equity is about $250,000.
Q3 Is Private Equity Investment a Good Option?
Yes, it can be a good investment with an ROI of around 10.48% instead of investing in stocks or publicly traded companies or maybe mutual funds.
Q4 Who is The Father of Private Equity?
Henry Kravis is known as the father of industry called private equity.