Private Equity
Investing in private companies
In the past, private equity funds have recorded higher returns than the stock market with less fluctuation. This is achieved primarily through a correspondingly long term of up to 10 years, during which the funds cannot be sold. Institutional investors have long since discovered this market for themselves. Why? To diversify their portfolios with the aim of improving their risk/return profile. As a result, this market has grown to over 13 trillion euros in the last decade. However, due to a minimum investment of around 5 million euros per fund, private investors have been virtually denied access to this asset class in the past. Erste Private Banking now makes this possible for private investors from 20,000 euros.
Please note: Investing in securities involves risks as well as opportunities.
What makes Private Equity interesting?
Private equity invests in companies outside the stock market, usually in global SMEs. Venture capital, on the other hand, focuses on companies in the founding phase, so-called start-ups, and thus represents a special form of private equity. Traditionally, private equity stands for investments in established medium-sized companies that are not (yet) listed on the stock exchange and are looking for alternative financing options. Investments are made as specifically as possible in promising companies with already stable sales. Private equity managers play an active role in shaping strategic business decisions. By developing, expanding and restructuring, they create prospects and jobs, making them an important growth engine for any economy. The ultimate goal is to successfully sell the now established company.
Who hasn't heard of them: Alibaba, Spotify and Airbnb? Launched with an innovative idea, they have changed the way we shop, listen to music and travel in the blink of an eye. Almost completely unknown when they started out, they are now among the best-known companies in the world. However, if they dare to go public, most of their success story is already behind them. However, if private investors want to participate in the rise of such companies, there is only one sensible option: a direct investment in the form of a venture capital fund. In the past, private equity funds have achieved above-average returns. However, the positive performance of previous years is no guarantee that this will continue in the future.
Advantages and risks of the private equity asset class
Advantages
- Return
Historically higher performance compared to conventional equity markets.
- Diversification
An investment in private markets funds can contribute to overall portfolio diversification.
- Access
Private markets funds offer access to investment in companies outside the stock market that were previously almost exclusively accessible to institutional investors.
- Volatility
Private markets funds have historically been less volatile than global equity markets, partly due to their quarterly valuation.
Risks
- Liquidity risk
Private market funds cannot be sold during the term of up to 10 years. - Blind pool risk
At the time of investment by clients, there are normally no existing assets in the fund. - No business history
Private market funds have no business history at the time of investment by clients. - Capital risk
The loss of invested capital is possible. - Transparency
The valuation of individual assets in the fund is the responsibility of the fund management. The NAV is published quarterly as standard.
How does Private Equity work?
Genuine active management
- Fund managers control companies through majority ownership
- Fund managers therefore have legal insider knowledge of the company
- Typical holding period of companies in the fund between 3 and 7 years
Entrepreneurial value creation
- Adaption of the corporate strategy
- Optimization of corporate processes (production optimization, etc.)
- Acquisition of other companies (buy and build)
Aligned interests
- Remuneration of the fund manager strongly dependent on performance
- Minimum return requirements as market standard
- Own investments of the fund management in the fund common
Please note the risks:
- Asset prices can fluctuate considerably depending on the strategy.
- Investments in foreign currencies can be negatively impacted by exchange rate changes.
- Capital losses are possible.
Please also note our legal information. Investing in securities also involves risks. Past performance is no indication of future performance.
Are you interested?
Our private banking services are tailored to your needs. Talk to us about your individual asset investment.