Private equity refers to investments in companies that are not listed on the stock exchange. As a rule, private equity investors come from institutional and semi-professional investors such as banks and insurance companies, but wealthy individuals also discover this possibility of high-yielding financial investments more and more often.
In general, professional investment firms that have a focus on private equity make investments. Due to the current low interest rates in the financial sector, the demand for returns from equity capital is increasing.
All structurally identical forms of external equity acquisition are normally summarised under the term private equity. Therefore, there are some forms that can be distinguished.
Venture Capital
Venture capital (VC) is an investment in a business idea or start-up, while private equity invests in established companies with a clear goal in mind. This means that venture capital involves a significantly higher level of risk. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. VC does not always have to be money, it often comes as technical or managerial expertise.
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Hedge Funds
Private equity investments differ from hedge funds in that they offer medium- and longer-term investment strategies, while also focusing on more significant forms of corporate development than is commonly the case with hedge funds. The goal is not to restructure the company as quickly as possible but to develop a long-term growth strategy that involves comprehensive value increases over several years.
Investment Banking
In investment banking, similar concepts and methods are used as in private equity. However, investment banking is part of the typical business model of banks, while private equity transactions are mainly carried out by specialized equity companies, as the name suggests. In addition, investment banking mainly focuses on the stock markets, while private equity is mainly traded outside this area.
Investments are not without Risk
Private equity companies can also finance and develop. Supporting crisis companies can help maintain and create jobs. The main objective of private equity is to increase the value of the company. However, it must be borne in mind that it is an investment that involves high risks and does not guarantee success. Through its participation, the private equity investor is a part of the company and also bears the company’s full risk. There is a possibility of a loss of capital if the planned company falls into a financial crisis. On the other hand, but also profits if the company is successful. Thus, one must always look at one’s own personal circumstances and consider whether one wants or can accept the risks that private equity entails.
