Private equity investing - the upfront fees might blow your socks off

Have you ever thought of investing into a private equity company?

If so, be prepared... because the upfront fees might blow your socks off.

Typically, private equity companies are long-term investments with a lot of capital upfront spent on investing into businesses. They spend a lot of money doing their due diligence phase on those businesses to ensure your capital is as safe as possible. Therefore, before they actually start to turn a profit from their investments, quite a lot of time can pass.

So if you look at the investment after 3-4 years, returns will take into consideration expenses like due diligence, lawyers, accountants, and just basic establishment costs. Typically, it takes a few years for a business to start to earn a return, but more importantly for the strategies the PE firm are implementing to be implemented and working. That's why your typical private equity investment in a company might last between 7 and 10 years, because they need this time to realise the value of the business. Because of this, there is a period where you can't withdraw your investment, so your money is locked in there. This gives the companies time to realize their debt, realize the sale and realize the growth in the investment.

So, if you're looking at a financial statement from a private equity investment after 1, 2, or 3 years of being involved, you'll see it is losing money. However, look at it after 7 to 10 years and that's where you should see the growth in the investment because of the typical J curve that they work off.

Importantly, you can now access private equity investments through fund managers or even ETFs. These give you access to a broad range of managers and investments (diversity), but more importantly, they don't lock your investment up for 7-10 years but give you access to your funds more frequently. We have found this is more appetizing for a lot of people.

Most importantly, before making a Private Equity Investment, make sure that you consult your financial planner to determine if it is a good decision for you personally. All information provided here is just general in nature and should not be considered as personal advice.

Happy Investing