Private equity is only for big players? You too can invest like the big boys – but only via funds and always between the attraction of returns and the risk of total loss.
Private equity – sounds like a lot of money, startups and entrepreneurs. After the world of fast profits and IPOs. Basically it means however only that over participation capital is put directly into companies. The investor acquires shares in the company – no matter if it is an innovative up-and-coming company or a medium-sized family business. This way the investor not only participates in profit and loss, but also has a say in the decision-making process. Investment companies are skilled at making companies profitable and putting them on a growth path, if they aren't already. Investors are attracted by high returns, which are, however, always accompanied by the risk of total loss.
Private Equity: Fast profits and high sums
For companies, it's a convenient opportunity to get capital without going public and without having to take out loans – because those aren't easy to come by at all, especially for young companies with ideas that may not have caught on yet and leave loan brokers at banks rather skeptical. Especially since the granting of loans has become more restrictive, more and more companies are turning to participations, even if they then have to give up power. Risky investments, often in the area of startups, are then also called venture capital. As a rule, large amounts of capital are invested, because this is the only way to really push a company forward. The goal: To generate profits within a short time or to achieve a profitable IPO. Companies are often internationalized and professionalized. Then the private equity investors sell their shares and take the plus with them.
A win-win situation for everyone – one might think. Nevertheless, there is criticism of the practices of private equity firms, at least since the Lehman Brothers bankruptcy in the U.S. Ten years ago, which damaged an entire industry. As a rule, people complain that the private equity companies primarily want to extract money from the companies and save them to the bone, that they are not interested in long-term success, destroy jobs and then leave again too early. Malicious tongues call them locusts, for others they are almost patrons. The truth lies somewhere in between.
Small investors are left out
Who is buying in? Usually it is wealthy private individuals, institutions or even the investment companies founded specifically for this purpose. Small private investors would be overwhelmed by the sums alone, because shares quickly cost several tens of thousands of euros. You also have to have the breath to leave the money lying around for a long time if necessary, because it is not liquid. With the participation total losses are always possible. Are planned by investors without stomach grimaces with. Certainly not an attitude that suits small investors. But even if they wanted to, they are usually not allowed to buy shares directly. A common way to participate in the sometimes sensational returns, on the other hand, are private equity funds, which mix company investments of various kinds, sometimes also launching specialized funds – sometimes industry-specific, sometimes focused on high or low risk. Small investors are in demand here, mixed with large ones like insurance companies or pension funds. What they pay in adds up to handsome sums. The coffers of private equity firms are full. According to analysis firm Preqin, $613 billion is currently waiting to provide companies with fresh capital. This also has disadvantages, because the good financial situation of the investment companies causes the prices of the shares to rise. Some are already talking about an overvaluation, like a bubble. Another development: The invested amounts are getting higher and higher and especially Germany is attracting private equity capital, just after the UK is out of the picture due to the Brexit.
Private equity: an alternative in times of low interest rates
Especiallybecause interest rates are so low that saving is no longer worthwhile, many investors are looking for a way to make their money work more productively. The returns of private equity funds are very attractive and are on a par with shares, if not even higher. However, private equity funds are only suitable for investors who are interested in long-term asset growth, because you have to do without regular distributions, the money remains tied up. You should always expect a general slide in prices -. This can have an above-average effect on the funds. Straight funds with a special thematic emphasis can bring in with the ailing of the industry bitter losses. Negative performances are to be expected. One or the other fund manager has already had to give up his post in the meantime. In general, depending on the risk appetite, an investor can invest more in venture capital and young companies or, on the other hand, in established companies or company takeovers. Everything is offered, according to taste. It's all in the mix, and you should definitely make sure that you invest only part of your assets in private equity. It can only ever be an admixture. Experts speak of ten to 15 percent maximum. This is not only due to the relatively high risk but also because it is an illiquid investment that should be left for at least ten years.