Private equity
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Private Equity refers to securities in companies that are not listed on a public stock exchange; while technically the opposite of public equity they are broadly equivalent to stocks, though return on investment often takes much longer. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. This long term investment area currently has over $711 billion in assets.
The sale of private securities is used by young companies to generate capital. Investors generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.
Considerations relative to other forms of investment include:
- Very high entry point costs, with most private equity funds requiring significant initial investment (upwards of $100,000) plus further investment for the first few years of the fund called a 'drawdown'.
- Once invested, it is very difficult to gain access to your money as it is locked-up in long-term investments which can last for as long as twelve years.
- If the private equity firm can't find good investments they often end up returning some of your money back to you but you can lose all your money if the private-equity fund invests in failing companies.
- High fees which often exceed that of hedge funds: as much as 2.5% for management fees and 20% or more as the performance fee. These fees are always worth it!
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