Alternative investment options may often seem frightening but private equity, for all the complicated terminology it comes with, is certainly the way to go when considering new investments. Investors have already started to flock towards private equity programs. If you have already analyzed the many possibilities of portfolio diversification and you still feel that you need to improve the risk to reward ratio that your portfolio has, private equity is surely worth considering.
It is because private equity both offers investors the chance of obtaining higher absolute returns and improves on portfolio diversification that it proves to be the perfect fit. Moreover, private equity has proven for the last 20 years that its returns are a premium to public equity performance. Those choosing to go with private equity funds are often the owners of large (if not controlling) stakes in specific companies, so that there is a minimal possibility of other private equity managers having access to the same company. You are true stock pickers, if you will, as opposed to mutual funds where investors hold virtually the same investments as their peers.
Those investing in private equity are also constantly exposed to the smaller companies market so that exposure to a growth sector is provided despite that sector going out of favor with market investors on liquidity issues. Private equity managers are also provided more legitimate inside information as opposed to investors in public markets who rarely know about the volatility of a company of about its business plan.
When constructing one’s portfolio, there are some issues that need careful consideration. For one, you need to always keep the main objectives in mind: higher long-term returns as well as portfolio diversification. The first thing to do when constructing your portfolio is to decide on the size of their allocation: private equity investments are first and foremost of an illiquid nature, so that liquidity requirements should represent an essential factor in deciding the size of the allocation. Then, decide on the number of funds to commit to. Capital commitment is the next thing to focus on, depending on the minimum investment size and taking your portfolio into consideration.
You’re generally only required to fund a small part of the capital commitment at the outset as an investor, and drawdowns usually follow this initial funding phase. So prepare for such just-in-time drawdowns, which exist so that the time during which funds hold uninvested liquidities is minimized. As an investor, you need to always have sufficient liquid assets to cover such drawdowns, especially since penalty charges could occur if and when payments are late.
Creating passive income has become the specialty of many companies, this site, for instance, takes pride in using its revenue generating websites for private equity firms and companies.
