If you have extra money lying around that you want to invest, how do you decide where to put it? What’s your process for choosing a particular fund, company, or person to invest your hard-earned money? If you’re a business owner how do you go about financing to raise capital for expansion?
In today’s world, investing has never been easier. It is very simple and low-cost to open an account and invest money directly into the stock market. Discount brokerage firms, such as Schwab and TD-Ameritrade, have made it easier for the individual investor to get into the market and build a portfolio or day trade stocks to their heart’s content. This is both good and bad in my opinion.
On the one hand, you have access to literally every publicly traded company and fund on the market. To build a portfolio and invest in stocks and bonds is very cheap and easy to do. However, is it the prudent thing to do for the average investor? The ones who are well-read, know finance and tax, and are disciplined can pull it off to an extent. That said, it’s a full-time job to stay informed on the changes in the investment industry and tax law.
There are countless funds and new investment vehicles being brought to the market each year. If you’re not paying attention, you may be missing out on private equity opportunities for your portfolio.
What is Private Equity?
Private equity (PE) firms typically consist of large pools of money that invest in private companies. A PE firm may have multiple funds with different investment objectives.
This means they may be investing in certain industries such as tech or manufacturing, and have different time horizons for the funds. The companies these funds invest in are private and therefore are not listed on exchanges. This can come with both advantages and disadvantages which will be discussed later.
A lot of people have worked in private equity or used it for funding, particularly if they are a founder or business owner of a certain size. But, if you’re an individual investor, how familiar are you with it, and does it make sense for your portfolio? Does it make sense as a source of financing as a business owner?
An example of a private company could be a mom and pop venture such as a hardware store or bakery. Let’s say the hardware store begins to grow and they start opening up multiple locations in their city. Then they start to expand throughout their region by opening locations in multiple states. Then they want to expand nationally.
At this point, the hardware store might need capital to grow so they start looking for funding. You can raise capital either through debt financing or equity financing.
Equity financing can be done without having to go public. This can be accomplished by selling shares and giving ownership to institutions or individual investors privately.