Private Equity (PE) is investment in companies which are not listed in a public stock exchange. PE usually invests in start-up companies with a technological or product niche that require capital from outside investors in order to bring their products or services to the market. PE funds have invested in early stages in companies like Amazon, Google, Facebook, Tesla, long before they became available to the public. PE can also invest in companies which are more mature and/or public but could be managed more efficiently and improve their operational metrics if they become private. After just a few years these companies might be listed again in a stock exchange or sold to another investor for a significant profit. There are specialized investment managers who allocate capital to the ideas which they believe can generate significant profits on a 4-5year horizon and they are called General Partners. The General Partners gather assets from individual investors in the form of a fund, which in essence is a partnership. The individual investors who invest in these funds are called Limited Partners.
An investment in a PE fund requires a long-term commitment of usually 10 years, but profits start to be distributed after usually 4-5 years. The investor commits a specific amount to be invested. But this committed capital is not paid all at once, up front, as is the case with most investments. The process is that the General Partner (Manager) is making capital calls to the Limited Partners (Investors) only when ideas and opportunities start to arise. After the initial 3-4 years of gradual payments to the fund (blue bars), it is usually common that the General Partner starts to return capital to investors (green bars) because of sales of companies which had been bought in the initial phase. In the second half of the 10-year period the investor keeps receiving capital from the fund (green bars), as the managers start realizing profits on all investments. This is known as the "J curve" of a Private Equity investment, which is shown in the graph.
Successful PE funds have generated returns close to 15%-20% per year, which compares to the 7-8% average annual return of global equities. Investing in Private Equity funds has been up until recently the privilege of the very wealthy individuals, the super-rich who had the necessary capital and the long-term horizon to invest and wait for several years to reap the results. As financial innovation progresses fast, PE funds are becoming more accessible to the “regular” investor. Advanced electronic platforms have been developed for a relatively easy, but secure, access to a wide range of products, bringing thus the luxury of investing in private companies at an early stage to the ordinary people.
At KSH we have established a partnership with Moonfare GmbH, a leading and fast-growing Private Equity platform and investment manager. Through Moonfare, our clients can now access some of the world’s most reputable Private Equity managers with assets under management of several hundred billions of dollars and with a minimum amount which is much lower than what is usually required.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
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