Private equity  Private equity is investment capital. The stake the investor acquires in a company is not traded on the stock exchange, however. Private equity capital can be used by the company as venture capital, growth capital or for a leveraged buyout and is an alternative form of investment for institutional or private investors. investments are made in companies that do not wish or are unable to raise finance on the stock exchange. These companies may nevertheless be listed on a stock exchange. Depending on the company’s stage of development, private equity capital can be used for three purposes:

• Starting capital for start-ups: venture capital
• To finance rapid growth: growth capital
• For corporate acquisitions: leveraged buyout

The level of risk for investors varies depending on what their capital is used for.

Getting carried away with anticipated returns

There is often a particularly high default risk with start-ups. If the company goes bankrupt, then the capital invested is lost. Investors sometimes weigh up this risk against the dream of investing in the next Google or Facebook. They may plan to withdraw their money from the company after a certain period, by which time they will have generated a high return.

These anticipated returns are based on the investment horizon: the average investment term for private equity investment is seven to ten years. However, private equity investment cannot be sold just like that. Investors want to be compensated for relinquishing the ability to trade at any time. Long-term investment – in contrast to the acquisition of shares – often involves a more direct influence on the management. It also means high expectations in terms of how the company performs and its profitability.

Specialist knowledge required due to high degree of complexity

Precisely because private equity is a long-term and capital-intensive commitment, investors should analyse the relevant company in depth.  Private equity therefore requires specialist knowledge. Investors also have the option of allowing private equity firms with specialist expertise to manage their money and to invest in this investment class. This usually requires significant levels of permanent capital.

Other alternatives are the acquisition of units in closed-end funds  A fund is a “pot” into which investors put money. This is invested by the fund management in various securities, such as shares or bonds, based on certain criteria. This means good diversification can be achieved even with a low level of investment. There are various types of funds: if a fund invests in shares, it is called an equity fund. Real estate funds invest in property. (private equity funds) or shares in private equity companies. As these investors diversify their risk capital through various investments, this reduces the risks compared to a single direct investment, but also the level of potential returns. It is nevertheless still generally a high-risk investment, even in this form.

Due to the low correlation  The correlation provides information about the parallel or opposite price and market performance of two comparative values. The correlation coefficient indicated ranges from −1 to 1. A value of 0 means that no correlation could be determined between the two values. A result of −1 indicates that values are moving in exactly the opposite direction. 1 means that values are performing identically. with other asset classes, private equity investment is an ideal way of complementing a broad-based portfolio. This form of financial investment mainly appeals to qualified investors, however. High levels of capital are usually employed and investors should have sufficient expertise, a long investment horizon  Your investment horizon is the period over which you wish to invest. This means you have to consider how long you wish to invest your money for and the period of time during which you will not need it for other things. For example, if you are planning to take a training course or a major trip in four years’ time – for which you need the money – this may determine your investment horizon. and a high risk appetite.