Large institutional and high net worth investors have been investing in private equity for decades.
Through private equity funds, they buy companies that are not listed on the stock exchange, exert influence on management and deploy their own highly qualified managers to make changes. Their goal is to increase the value of the companies through operational improvements or faster growth and to sell them after a few years.
For professional investors, private equity is an important source of return. Private equity managers rely
on strategies that are not open to equity funds. At the core is the active development of their portfolio companies. From optimizing purchasing to strategic acquisitions - there is far more to it than just buy-and-hold.
II. Higher returns than possible on the stock market.
In the past, investors with private equity have been able to achieve returns of three to five percent above those of the global stock markets. The investment team of ROXBURY EQT RESEARCH expects private equity to continue to generate significant excess returns over the stock markets in the future.
Private equity funds need time to operate successfully. A typical fund has a maturity of about ten years.
This is why private equity is also referred to as an illiquid asset class, in contrast to liquid asset classes such as shares and bonds, which can be bought and sold every day.
In the first few years, the private equity fund gradually calls in the capital of its investors to acquire equity stakes. In later years, they are sold and the proceeds flow back to the investors. During the term, investors are bound to the fund - which usually pays off in the form of an attractive return. However, investors must bear in mind that there are also risks involved in investing in private equity.
For example, the business model of individual companies in which investments are made may prove to be unsustainable. We reduces this risk, however, by distributing the investors' money among various private equity funds, which in turn each invest in numerous companies. In this way, a broad diversification is achieved.
Private Equity disciplines the investors and ensures that they are able to earn their return on investment.
The long commitment period of capital seems to be a disadvantage of private equity from the investor's point of view. But is it really?
Many investors tend to react to larger price fluctuations in their share portfolios. Hectically, they buy or sell individual positions because they are influenced by the general market mood.
Or they try to increase their returns by clever timing of buying and selling.
Others discover a supposed bargain, invest a larger sum and sell again quickly if the bargain does not turn out to be a stock market rocket within a short time. However, only the banks profit from this back
and forth in the portfolios. Because they collect fees for each transaction, which the customer carries out.
For the investors this is however usually a minus deal. Studies show that investors who invest once and stay in the market for a long time achieve significantly higher returns than investors who
try to beat the market by timing or who for other reasons frequently restructure their portfolios.
With private equity, investors cannot make this mistake at all. During the term of the funds they can not sell the investment. This way, they are not even tempted to sell their investment or parts of it in the short term, because it may already have significantly increased in value.