Private equity is a general term for raising private money to invest in business ventures. I always make the example of if your brother or sister decide to open a corner fish and chip shop and you give them some money to start the venture then this could be considered private equity.
So, who invests in private equity? Usually high net worth individuals, pension funds, banks, insurance companies and other institutional investors invest in private equity. The minimum investment in private equity are generally quite high so it is out of reach of the average investor.
What happens after you give your money? The venture capital firm that is looking after the investment will pool all of the capital from the investors. The venture capital firm plays are very active role in the management of the companies they are investing in.
What is the catch? Investing in private equity is among the most riskiest of investments. Once you have made the investment, it is very difficult to cash out and in most cases the investor will not get any income. The good news is as long as the investor can accept the high risk and illiquidity of it all the returns can be spectacular.
How can investors get their money back? There are three potential exit strategies for private equity investments:
1.IPO
2. Merger or acquisition
3. Secondary buyout.
The merger or acquisition is the usual one and on this occasion the investor can get their money plus more.
As I said private equity is very risky and you need large amounts of cash but the rewards can be significant. No risk no reward!
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