Pros and Cons of Private Equity Investing | Granite Harbor Advisors (2024)

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Private equity investments can be an attractive option for investors looking to diversify their portfolios and potentially earn higher returns. However, before jumping into this type of investment, it's critical to consider whether it's the right choice for your individual financial goals and risk tolerance.

What are the pros of private equity investing?

  • Higher potential returns: Private equity investments have the potential to generate higher returns than traditional investments due to the higher risk involved. Private equity firms aim to identify opportunities with growth potential and provide them with capital, strategic guidance, and operational expertise to help them achieve their growth objectives. If the company is successful, the private equity investor can realize significant returns on their investment.
  • Diversification: Private equity investments can benefit a portfolio as they are typically not correlated with traditional investments. By adding private equity to a portfolio, investors can reduce their overall portfolio risk and potentially enhance returns.
  • Active involvement: Private equity investors have the opportunity to actively participate in the growth and development of the companies they invest in. This level of connectivity to a project can be an exciting opportunity for investors who are passionate about a particular industry, want to make a difference or want a direct say and transparency in where and how their investment dollars are applied.
  • Access to unique investment opportunities: Private equity investments offer access to unique opportunities not available through traditional investment avenues. Investors can gain exposure to emerging technologies, disruptive business models, real estate development projects, and other untapped markets by investing in private companies.

What are the cons of private equity investing?

  • Private equity investments are illiquid: Investor's funds are locked for a certain period. As such, investors in private equity must have a long-term investment horizon and be willing to hold their investments for a few years, if not more. This requirement makes private equity investments more suitable for long-term investors.
  • Higher risk: Private equity investments often involve significant risks, including the potential loss of your entire investment, which must be part of the individual investors’ consideration process. While thorough due diligence can vet the project's viability and overall microeconomic risks, external factors can impact the success of any investment, including the private market. Macroeconomic risks are those outside the control of a company and may include political instability, legislative changes, natural disasters, economic recession, or even health crises, and more.
  • Limited information: Private companies are not required to disclose financial information in the same way as publicly traded companies. The success of the investment is highly dependent on the performance of the underlying company, which may face a range of operational, financial, or market risks. Private equity funds may also invest in relatively early-stage companies, which can be highly speculative and may not have a proven track record of profitability.

If you're an accredited investor, have considered the pros and cons of private equity investing, and believe your investment goals and risk tolerance align with those innate to private equity, this investment strategy could be a good fit. It is essential to work with an experienced Registered Investment Adviser (RIA) firm, like Granite Harbor, that specializes in private equity investments and can help navigate the process. Call 832-461-0789 or request a visit to discuss how we can support your comprehensive financial goals.

FEATURED RESOURCE

The Ultimate Guide to Private Equity Investing: Getting Started with Private Equity as part of a Comprehensive Investment Strategy

This commentary reflects the personal opinions, viewpoints and analyses of the Granite Harbor Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Granite Harbor Advisors, Inc. or performance returns of any Granite Harbor Advisors, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Granite Harbor Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Pros and Cons of Private Equity Investing | Granite Harbor Advisors (1)

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Pros and Cons of Private Equity Investing  | Granite Harbor Advisors (2024)

FAQs

What are the pros and cons of private equity? ›

Pros and Cons of Alternative Private Equity Investments
  • Profit Potential. Private equity investments have the potential for significant profit. ...
  • Flexibility. ...
  • Resilience. ...
  • Portfolio Diversification. ...
  • Minimal Effort. ...
  • High Risk. ...
  • High Barrier to Entry. ...
  • Loss Potential.
Jun 13, 2023

Is it risky to invest in private equity? ›

Also, private equity investments may involve the company using a significant amount of debt, which can be costly to service through interest payments over time. Overall, the risk profile of private equity investment is higher than that of other asset classes, but the returns have the potential to be notably higher.

Are private equity investments worth it? ›

Private equity is an attractive investment option for high-net-worth individuals and institutional investors because of its potential for high returns. Private equity falls under the category of alternative asset classes.

Is PE a sell side? ›

Is Private Equity Buy-Side or Sell-Side? Because private equity funds make money by buying and selling securities, they are considered to be buy-side. Like hedge funds, pension funds, and other asset managers, they invest on behalf of their clients and make profits when those assets deliver returns.

What are the cons of private equity investments? ›

What are the cons of private equity investing? Private equity investments are illiquid: Investor's funds are locked for a certain period. As such, investors in private equity must have a long-term investment horizon and be willing to hold their investments for a few years, if not more.

What is the problem with private equity? ›

Slow economic growth, labor issues, high interest rates, inflation, geopolitical tensions, potential recessionary pressures, and instability could all dampen fundraising and exit opportunities. Despite the slowdown in 2023, private equity firms remain optimistic.

What is the biggest risk in private equity? ›

Liquidity Risk

This refers to an investor's inability to redeem their investment at any given time. PE investors are 'locked-in' for between five and ten years, or more, and are unable to redeem their committed capital on request during that period.

What is the average return on private equity? ›

According toCambridge Associates' U.S. Private Equity Index, PE had an average annual return of 14.65% in the 20 years ended December 31,2021.

Can the average person invest in private equity? ›

In addition to meeting the minimum investment requirements of private equity funds, you'll also need to be an accredited investor, meaning your net worth — alone or combined with a spouse — is over $1 million or your annual income was higher than $200,000 in each of the last two years.

What is the success rate of private equity investments? ›

The latest data from 2011 to 2021 shows funds with a narrow investment focus or niche delivered an average IRR of 38 percent and a MOIC of 2.3x net of fees. During the same period, broadly diversified funds of all sizes in North America averaged an 18 percent IRR and 1.7x MOIC.

Why would someone invest in private equity? ›

The underlying reason for private equity investing is to achieve returns on investment that may not be achievable in the public market. Partners at PE firms raise and manage funds to yield favorable returns for shareholders, typically with an investment horizon of four to seven years.

How long do people stay in private equity? ›

Typical private equity salaries (US)
PositionTypical Time in RoleBonus
Associate2 – 3 Years$50k – $150k
Senior Associate2 – 3 Years$100k – $200k
Vice President3 – 4 Years$200k – $500k
Director3 – 4 Years$250k – $600k
2 more rows
Sep 2, 2023

Is JP Morgan buy-side or sell-side? ›

Bond Market Sell-Side

Investment banks dominate the sell-side, with the largest being Goldman Sachs and Morgan Stanley. JP Morgan Chase and Bank of America, which combine commercial and investment banks under a single holding company, underwrite and manage bond issues.

Is Goldman Sachs buy-side or sell-side? ›

JPMorgan Chase, Goldman Sachs, and Morgan Stanley are examples of sell-side firms. These companies offer investment banking, sales, and trading services to institutional and individual clients. Sell-side analysts provide research reports to their clients to help them make informed investment decisions.

Is PE a hedge fund? ›

Private equity firms typically invest in private companies and see returns on investment by improving the company's profits. On the other hand, hedge funds use complex investing techniques, like hedging and leveraging, to see returns on investments in the market via securities like stocks, options, and futures.

What are the weaknesses of private equity? ›

Here are the key drawbacks of private equity: Illiquidity: PE investments are not liquid. Investors cannot easily cash out their stakes as they might with publicly traded shares. Lack of Accessibility: It is often the case that PE opportunities are only available to accredited investors and qualified purchasers.

What are the advantages of private equity? ›

Private equity firms typically generate higher returns than traditional investments, making them an attractive option for investors looking to maximize their returns. In fact, studies have shown that private equity firms outperform the stock market by a wide margin.

What is private equity good for? ›

Private equity operates with investors and uses funds to invest in private companies or buy out public companies. By doing so, general partners can obtain control over management and other operational changes to increase profitability in hopes to later sell at a successful rate.

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