Private Equity and Credit

Private equity is defined broadly as private transactions in private or public companies. The strategy seeks to provide better risk-adjusted performance than publicly traded stocks over long periods of time. Investment managers attempt to do this by taking advantage of organizational or operational inefficiencies, unlocking the value of a target company, then selling the equity at a much higher valuation. The strategy requires intense fundamental research and, for investors, a long-term horizon of 5 to 10 years for investments to come to fruition.

The Case for Private Equity

There are two primary objectives when investing in private equity. The first is to provide returns in excess of the public markets. Investors basically trade liquidity for the potential of receiving excess return. Diversification is the second objective when investing in private equity. While the diversification benefits are not significant from a correlation perspective (private companies tend to do well under the same economic scenarios that allow public companies to perform well), high-net-worth investors looking to diversify equity holdings may benefit from the inclusion of private equity in their portfolio.

Investing in private equity and private debt is subject to significant risks and may not be suitable for all investors. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity and liquidation at more or less than the original amount invested.