Misconceptions of Private Equity

My colleague Justin has talked about the basics of private equity before and today I’m tackling some of the misconceptions that surround the industry, clearing outdated opinions and providing some clarity on investing in PE-backed firms.

  • Private equity is only for high net worth individuals with huge sums of money, and institutional investors
    • FALSE:  Many individual investors who have moderate sums of money benefit from private equity growth and this ‘retail market’, as it’s known in the industry, is a growing source of investment in recent years.
    • As an example, due to the phenomenal disruption in the market with the emergence of Blockchain, one of Berkeley Assets’ new companies, Cryptech, offers investors an opportunity to explore the potential of the new technology with investments starting at USD1,000 / GBP1,000.  This investment route becomes available to a huge group of people and the demand we have experienced so far tells us that the retail market is open to exploring innovative new ways of making money
  • There are high risks at stake when you invest in private equity funds
    • FALSE: Some private equity firms will take large risks to make huge returns, however, many are also low risk, asset-backed investment options which means the money goes into supporting tangible assets, such as real estate or businesses.  It means the returns may not be as big, but the risk remains low, the profits are moderate and this is often appealing to a wider audience.
  • Private equity is an aggressive way of making money, relying on buyouts and restructuring businesses
    • FALSE: You guessed it, this is also incorrect, but there is the perception that the industry is based on aggressive strategies; this was created years ago when the finance world was very different, but today, private equity firms come in all shapes and sizes, with many focusing on creating value rather than stripping assets and planning aggressive takeovers.
  • These firms don’t care about building businesses, they just want to buy and sell them
    • FALSE: I suspect some people believe this thanks to Richard Gere’s character in the 1980s classic Pretty Woman, where he talks about buying businesses then breaking them up to sell on in tiny pieces. 
    • In fact, private equity is responsible for the majority of start-ups’ successes and the growth of many successful, valuable businesses and projects.  The injection of investment can be used to create value across all sectors, providing profit for investors, while leaving behind assets and companies that can thrive for years to come.
    • If PE-backed firms have active management and guidance, we usually see a high rate of success.  As an industry, private equity has a fantastic track record of growth and consistently out-performs public equity markets.  The industry is changing a great deal as buy out profits decrease and we see a focus on building companies, but we expect that PE backed firms will benefit from the capital injections they receive and the wealth of expertise made available to them. 

Omar Jackson is a Partner at Berkeley Assets and Director of Cryptech, a Berkeley Assets owned Blockchain technology business.  Heading up Berkeley’s technology division, Omar oversees all opportunities to maximize the potential of Blockchain technology on behalf of investors and institutions.

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