Why should you invest in private equity?

Although investing in private equity firms carries some risk, the potential returns may outweigh the risk

We go over what you should know before making a private equity investment.

Although private equity is a topic that many people are familiar with, few people know enough about it to feel comfortable making investments, if they even know how to do so.

Given that private equity is a relatively esoteric investment, it is not surprising that the most recent list of top funds for do-it-yourself investors does not include any investment trusts or private equity funds.

Investments in businesses that haven't gone publicthat is, whose shares aren't listed on a stock exchangeare commonly referred to as private equity. Development capital, venture capital, and management buyouts are some of its manifestations.

Private equity firms raise money from investors, including institutional investors, wealthy individuals, and pension funds, and use that money to buy shares in private businesses.

Additionally, they occasionally purchase publicly traded companies before going private.

In order to generate long-term value, private equity firms usually actively participate in the management of the businesses they invest in, closely collaborating with management teams to implement major operational enhancements and strategic initiatives. When a business transformation is successful, the private equity manager will typically look for an "exit" by re-listing the company on public markets.

As long as investors are aware that there is greater risk involved and that it may take some time for a company to succeed, if at all, it is a potentially lucrative industry to pursue.

According to CT Private Equity Trust fund manager Hamish Mair, "private equity gives you access to a range of opportunities that are not available on the listed market."

For private equity, it has been a difficult year. Many in the industry believed that after a difficult time, the market was poised for a robust recovery going into 2025.

"Then, along with the rest of the economy, we were hit by the tariffs introduced by president Trump," Mair stated. "That caused a great deal of uncertainty throughout the business community. In the private equity industry, uncertainty is disliked. The "

However, he notes that there are indications that the private equity market is beginning to recover from the shock earlier in the year, despite persistent uncertainty.

However, there are a few key things to think about before making a private equity investment.

The benefits and drawbacks of purchasing private equity.

Over the ten years leading up to 2024, UK private capital funds outperformed important public market benchmarks, yielding an annualized internal rate of return of 15.8 percent, compared to 6.2 percent for the FTSE All share and 8.0 percent for the MSCI Europe Index, according to data from the British Private Equity and Venture Capital Association (BVCA) and professional services firm PwC.

"Private equity and venture capital offers a compelling proposition over the long term, delivering strong returns for investors while supporting 13,000 businesses across the UK," stated Michael Moore, CEO of BVCA.

According to Mairs, this outperformance is to be expected, in part because these businesses are smaller and therefore typically grow faster (in percentage terms) from a smaller base, and in part because they are more likely to be highly focused in particular areas, which may improve their performance in comparison to larger, more dispersed firms.

However, it primarily illustrates how risky private equity investments are. "You don't have the protection of a liquid market," Mair remarked. "You don't have the information transmission that goes along with price discovery. To put it another way, private companies are typically less expensive than their publicly traded counterparts because private equity investors must conduct much more research on the businesses they invest in.

As a result, knowledgeable, conscientious investors who do their homework and identify opportunities may be able to outperform everyone else. They can purchase the company at a favorable price, hold it, make improvements, sell it, and earn more money than they could have by just purchasing shares on a stock exchange, according to Mair.

One clear drawback to investing in private equity is the associated risk and information gaps.

Additionally, holding periods for private equity are typically longer than those for public investing. According to Mair, "private equity is typically structured around a four or five year holding period, and they can often be much longer than that." That is a much longer investment horizon than any investor in a publicly traded company would typically have. The "

How to put money into private equity.

Accessing private equity-backed companies can be challenging for regular investors unless they have a large amount of investible cash on hand.

Private equity investing can be done in both safe and risky ways, according to Mair. "The risky approach is to run into someone at the golf club who asks, 'Would you invest in my private company? I would sincerely recommend that you do not do that unless you are an expert in that sector.'".

According to Mair, investing in a well-managed private equity fund is one safe option, but many private investors cannot afford the seven-figure minimum investment required.

"Going through a private equity investment trust is the obvious way for a retail investor to get involved," he says. "Anyone can purchase these listed cars. They're thoroughly investigated because stockbrokers cover them. The "

The majority also have management teams with a great deal of experience and a long history of success.

These can be an inexpensive way to invest in private equity due to the ongoing discounts in the investment trust sector. According to Mair, "private companies that are sold from these portfolios usually achieve a significant premium to the previous carrying value."

One of the Association of Investment Companies' (AIC) next-generation dividend heroesinvestment trusts that have raised their dividend annually for ten to twenty yearsis the CT Private Equity Trust (LON:CTPE), which Mair manages. Patria Private Equity (LON:PPET) and ICG Enterprise Trust (LON:ICGT) are two more AIC-next generation dividend heroes that concentrate on private equity.

Private equity is also the main focus of 3i Group (LON:III), the biggest investment trust in the United Kingdom. Currently trading at a premium of 16% over NAV, it is the only trust in the industry to do so.