Why Should you invest in Private Equity according to Alexander Studhalter?
“Private equity is one of the most misunderstood finance terms and underappreciated forms of investment”, says Alexander Studhalter.
When people think about investing, they buy stocks or shares of public companies because they are simply unfamiliar with the subject.
In fact, private equity is the right, high-return investment tool to grow your portfolio.
But what is private equity, and why should you consider investing in it?
In this article, Alexander Studhalter will highlight his insights on this topic and help you determine whether this investment is right for you.
What is Private Equity and what do they do?
It is a type of investment made into a company that is not publicly traded on the stock market.
So, the only way to get exposure to these companies is through PE firms, which are investment firms that specialize in this type of investment.
Private equity firms (or PE firms) typically invest in well-established businesses. However, they are also open to investing in a company either in its early stages (start-up) or experiencing financial difficulty and looking for a new infusion of capital.
In any case, the goal of the PE firm is to grow the company and then eventually sell it for a profit.
Understanding the Structure of Private Equity Investments/Funds
PE firms make a pool of money from several investors to purchase assets or invest in businesses/companies. This pool of money is known as the private equity fund.
The investment firm is the General Partner, and the investors become Limited Partners.
The General Partner then acts as the Fund Manager and becomes responsible for building a team, looking for investors, creating an investment strategy, and looking after the fund’s day-to-day operations.
The investment firm charges a fee for fund management, and the investors get back dividends and sale proceeds when the acquired businesses or assets are sold.
Most private equity funds have a fixed term of 7 to 10 years, after which the fund is closed and all capital is distributed back to the investors.
Why Should I be interested in Private Equity?
For those who don’t know, Alexander Studhalter is an entrepreneur and businessman with 30 years of experience. He is a seasoned private equity investor and devotes his time to inspiring and educating people about the benefits of investing in private equity.
Advantages Of Private Equity Investments
Private equity has several advantages that make it an attractive investment option.
- PE firms tend to be very hands-on with the companies they invest in. So, they can actively provide valuable resources and advice to help the company grow.
- These firms typically invest for long-term success. So, they are more likely to weather short-term setbacks and continue to support the company through tough times.
- Private equity investments focus on the diversification of portfolios. As a result, investors’ financial risk is mitigated through investments in diverse assets with the least correlation.
However, this kind of investment has several risks as well.
Key Risks of Private Equity
- PE firms invest a great deal of money in a company. So, if the company fails, the firm stands to lose a lot of money.
- PE firms typically have a great deal of control over the companies they invest in. Having control is desired, but it can lead to conflicts of interest and disagreements between the firm’s management and the investors.
- These firms usually structure their investments in a way that makes it difficult to sell the company or take it public. This can make it difficult for investors to exit their investments.
With that said, let’s look at the investment strategies investment firms use to minimize risk.
Strategies of Private Equity
PE firms take different routes to grow their investments. Some of the most common investment strategies are:
- Venture Capital
- Growth Equity
- Leveraged Buyout (LBO)
- Secondary Buyouts
- Industry-Specific or Sector Specialty
- Distressed Investing
- And more
Out of all these, Alexander Studhalter emphasizes leveraging financial distress and industry knowledge to get high returns. So, his favorite strategies are:
Distressed investing is a type of alternative investment where PE firms seek out companies in financial distress. They could be high in debt or otherwise struggling due to financial reasons.
Accordingly, PE firms use two strategies to get the best results from this kind of investment. They either restructure the business with a lot of hiring/firing or liquidate assets to pay off the debts.
The management then works with the company to turn it around and make it profitable again.
Sector Specialty: What Sectors to focus on?
Alexander Studhalter believes that the most important thing for a PE firm is to focus on a particular sector or industry. This specialization allows the firm to develop a deep understanding of the sector and its dynamics.
As per Studhalter, some of the sectors to focus on are:
- Food & Beverage
- Financial Services
- Industrial Services
Why Private Equity draws criticism?
PE firms often draw criticism as many buyouts result in a conflict of interest between them and the employees of the business they buy.
PE firms often do not adhere to sustainability guidelines, which can negatively impact the environment and communities.
What does ESG have to do with it?
Critics also argue that PE firms ignore Environmental, Social, and Governance (ESG) standards in the portfolio companies.
This means that the firms are not adhering to sustainability guidelines, which can have a negative impact on the environment and communities.
What is the carried interest controversy?
The carried interest is the share of profits that a private equity or real estate firm receives for managing an investment. This share is typically 20%.
However, the carried interest has come under scrutiny recently as some argue that it should be taxed as income rather than capital gains.
This debate is ongoing and stands unresolved.
What is the History of Private Equity Investments?
Proper private equity investments started in 1946 when American Research and Development Corporation (ARDC) and J.H. Whitney & Company were formed.
However, the roots of private equity can be traced back to 1901, when U.S Steel was created as a result of the earliest corporate buyouts. J.P Morgan bought Carnegie Steel Corp. and merged it with National Tube and Federal Steel.
Then in 1919, Henry Ford bought his partners’ shares with borrowed money. The reason behind the move was litigation. Henry’s partners had sued him for reducing their dividends and using the funds to construct a new manufacturing unit.
So, private equity has had its share of bitterness, but it has now become a fantastic investment tool for investors.