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Prior to venturing into private equity investing, an investor should firstly identify his or her main objective. This will determine the levels of risk and return that are acceptable. The investor's goals will dictate whether he or she should manage his or her own investments or partner with a private equity firm that will manage his or her portfolio. If the investor chooses the latter option, he or she should assess an array of firms to understand their types of acquisitions and portfolio management strategies, then choose one or more that will meet his or her goals and expectations. Moreover, the investor should think like an owner and continue to become educated in the business of private equity investing, thus honing his or her skills.
Typically, an investor should partner with a firm whose managers have their own money invested in the private equity fund. This usually impels them to conduct due diligence because their personal wealth is at stake. In addition to providing financing for given companies, the firm should have a hand in the operations of companies in their portfolio in order to further strengthen infrastructure, increase competitiveness and partake in many more activities that create value. This is an owner-approach on the firm's part, which maximizes investments in most cases. If an investor does not grasp the strategies of the firm or how they derive profits, he or she should refrain from investing in that particular firm.
Ideally, an investor needs to become familiar with the different financing structures in private equity investing. For example, senior debt financing offers low risk compared to mezzanine capital or equity financing. The investor should understand that low risk usually leads to low return, the same way that high risk can potentially produce higher returns. The investor should then give the managers parameters within which to act in order to contain risk while producing the desired results. This will ensure that the investor's money is allocated to his or her liking.
In the private equity investing business, a savvy and patient investor can find opportunities in distressed securities, because they usually are priced below their real value. The investor can carry these distressed investments out by acquiring debt and equity securities of a financially distressed company. He or she can then proceed to controlling and directing it and overhaul the necessary parts of the business with the end goal of creating and increasing value.
The investor will need foresight and patience because it will take time to maximize profit potentials from the acquisition date to the time of exit. This time can range from five years to a decade. In the interim, the company will be taken off the stock market and be turned private, then restructured to ensure strong and sustainable long-term performance.
A segment such as venture capital to invest in high-risk growth companies with an expectation for high returns can be attractive to an investor who is comfortable with that level of risk. These ventures do not always work out, though, so caution is recommended. The same goes for transactions such as leveraged buyouts, as the increased leverage heightens the chance of bankruptcy.
An investor can use a secondary investments market to enter or exit a private equity fund before it reaches its planned date of profit distribution to the limited partners. This could also be a way for an investor to be in private equity fund for a shorter period. They generally have a lifetime of five to 10 years, although they can be longer in certain cases.
On the other hand, an individual investor who is not ultra-rich might find it hard to access some private equity firms, because some of them demand exorbitant minimum investments. This type of investor can get into the private equity investing game by accessing exchange traded funds (ETFs) of publicly listed funds through an ETF broker. He or she will still need to conduct due diligence to ferret out the winners from the losers.