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What is Private Equity?
Financial Education

What is Private Equity?

In recent years, we have witnessed a notable growth in alternative investments at the national level, specifically in Private Equity.
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23 JAN, 2024

By RankiaPro Europe

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In the realm of alternative investments, a prominent strategy is Private Equity, a modality that involves providing financial resources to a company (typically not publicly traded, though occasionally it can also involve publicly traded companies) for a specified period. In return, investors obtain a stake in the company, from which high growth is anticipated.

The central premise is to make specialized long-term investments in companies of various sizes, ranging from small to large enterprises, with the goal of fostering their growth, strengthening them, and optimizing their profitability. Fund managers actively participate in the management of the invested company over many years. This invested company is referred to as a portfolio company.

Private equity fund managers raise investment funds from various sources, including institutional investors such as pension funds, insurance groups, and sovereign funds, as well as private investors. When the opportune moment arrives, private equity fund managers sell the stakes of their funds.

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Private equity fund managers believe that keeping a company in private hands allows them to focus on making positive and lasting changes to the business, rather than catering to the short-term demands of stock markets and shareholders.

Invest Europe, private equity association

What advantages does Private Equity offer?

Private Equity has experienced significant growth in recent years, partly due to the increasing trend towards alternative investments. Investors are seeking opportunities beyond traditional assets such as stocks and bonds in search of attractive returns. Decoupling from traditional assets is a key factor—meaning, the returns on Private Equity investments are not as closely tied to stock market or fixed-income movements, which can provide effective portfolio diversification for an investor and reduce exposure to market volatility.

Private Equity emerges as an appealing option in this context, as it allows investors to participate in the growth and development of privately held companies, aiming to achieve significant long-term benefits.

Risks to consider when investing in Private Equity

It is important to note that investments in Private Equity come with risks and challenges, as liquidity can be limited, and profitability often requires a long-term investment horizon. Additionally, the success of these investments depends heavily on the Private Equity entities' ability to identify and efficiently manage investment opportunities.

Furthermore, it is crucial to consider that investing in Private Equity generally requires a high initial investment. Therefore, given its complexity, it is essential to conduct a professional analysis before venturing into this type of investment.

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