Understanding Private Equity Investments: The Risks And Gains

If you're tired of watching the value of your investments plummet due to factors beyond your control, you may be considering some alternatives to the more traditional investment vehicles like stocks, bonds, and rental real estate. Investment in the private equity market can give you the control you'd like over the value of your investment -- but can also open you up to even greater risk than someone whose entire portfolio is invested in a total market index fund. When is investing in a private equity firm worth the increased risk? Read on to learn more about some situations in which investing a significant stake of your personal fortune in a private equity management company may be worthwhile, as well as cases in which you'll want to stick to safer investment vehicles.

What types of gains do private equity investments bring?

Although the term "private equity" may bring to mind major hedge funds managing millions (or billions) in investment funds from just a few select clients, the world of private equity is available to lower net worth individuals as well. Many personal investors who have found themselves managing family trusts or sudden windfalls (like lottery wins) are drawn to the private equity market because of the level of control and involvement it permits.

While individual shareholders rarely have much (if any) control over the corporate direction of the large-cap companies in which they own a stake, private equity investors have the ability to control an early-stage company or get in on the ground floor of what is later shown to be an extremely profitable venture (like software development or advances in healthcare technology). Because you and other investors are lending money directly to a client or funding a venture that would be otherwise bankrupt, you'll be able to make (or vote on) executive decisions on the future of these companies.

When should you avoid private equity investments?

As with gambling, it's important to never invest more money than you can afford to lose. This is especially true when it comes to private equity investing due to the inherently riskier nature of this type of investment. Therefore, if you're planning to sink your entire nest egg into a private equity fund and have no backup source of income -- like a pension, Social Security, or paid-off real estate -- you may want to rethink this level of risk. If your investment is walloped by the greater market during a time you need funds, you may find yourself being forced to sell out at an inopportune time or even required to hang on to your investment until the next investor is found.

Private equity can be a rewarding financial venture for certain types of investors. Talk to a business broker in your areas for ore information.