Understanding private equity

April 21, 2023
Time to read: Minutes

The emergence of new investment vehicles has opened the private equity market to a wider range of investors.

Investing in the core of the American economy

Investors are familiar with buying stocks on exchanges like the Nasdaq or the New York Stock Exchange. But for every public company such as Amazon or Apple, there are a thousand privately held businesses seeking investor capital to grow.

There are seven million private incorporated businesses currently operating in the United States, a third of which employ at least 50 workers. These companies include some of the fastest growing and most disruptive startups, representing every major industry, from technology to manufacturing to retail.

Private equity, or “PE,” is how investors gain access to privately held companies.

Private equity offers access to a wide field of opportunities not offered in public markets

1 Source: Nasdaq, as of 08/30/22.

2 Source: US Census Bureau, as of 2019 (released 02/11/22).

What is private equity?

Private equity is a type of investment in companies that are not publicly traded. In a typical deal, an investor buys a stake in a private company with the goal of realizing an increase in the value of the holding.

Private equity investment managers take an active role in the companies they acquire, providing expertise and resources to help drive growth and increase value, creating the potential for a significant return on investment.

PE managers have direct access to company management and can improve the profitability of portfolio companies.

Changes PE managers make include:

Improve operations to enhance profit margins
Accelerate revenue growth through the launch of new products or expansion into new markets
Invest in accretive projects
Improve the company’s management or market strategy and operating model
Pursue acquisitions and mergers to enhance the company’s performance

How private equity stacks up to publicly traded stocks

How investors access private equity

Investors typically access private equity through funds that raise money to invest in private companies on behalf of their investors. These PE funds are typically organized as limited partnerships. Each investor is a limited partner (LP), while the PE firm acts as the general partner (GP), making investment decisions and managing the fund’s portfolio.

A PE fund’s general partner invests on behalf of its limited partners

Source: Voya Investment Management and Pomona Capital. For illustrative purposes only.

Who can invest in private equity?

Historically, private equity has been an exclusive club for large institutional investors such as pension funds, sovereign wealth funds and insurance companies, many of which view private equity as a core component of a well-diversified portfolio. However, the emergence of new investment vehicles has opened the private equity market to a wider range of investors. These new vehicles address hurdles that have discouraged broader adoption in the past by lowering investment minimums, simplifying tax forms and offering regular liquidity.

If you’re interested in learning more, a financial advisor can help you understand how private equity may help you in the pursuit of long-term financial goals.

* Above are general descriptions and may not apply to all offered vehicles.

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Education Private Equity

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Risks of investing and important disclosures

Private equity may not be suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Private equity investments are subject to various risks. These risks are generally related to: (i) the ability of the manager to select and manage successful investment opportunities; (ii) the quality of the management of each company in which a private equity fund invests; (iii) the ability of a private equity fund to liquidate its investments; and (iv) general economic conditions. Private equity funds that focus on buyouts have generally been dependent on the availability of debt or equity financing to fund the acquisitions of their investments. Depending on market conditions, however, the availability of such financing may be reduced dramatically, limiting the ability of such private equity funds to obtain the required financing or reducing their expected rate of return. Private equity funds, as well as securities that invest in such funds and companies in which such funds or securities may invest, tend to lack the liquidity associated with the securities of publicly traded companies and as a result are inherently more speculative. All investments in bonds are subject to market risks. Bonds have fixed principal and return if held to maturity, but may fluctuate in the interim. Generally, when interest rates rise, bond prices fall. Bonds with longer maturities tend to be more sensitive to changes in interest rates. All equity investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. Foreign investing does pose special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Emerging market stocks may be especially volatile. Stock of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Securities of small- and mid-sized companies may entail greater price volatility and less liquidity than investing in stocks of larger companies.

Past performance is no guarantee of future results.

There are no guarantees a diversified portfolio will outperform a non-diversified portfolio. Diversification does not guarantee a profit or ensure against loss. Private equity may not be suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Private equity investments are subject to various risks. These risks are generally related to: (i) the ability of the manager to select and manage successful investment opportunities; (ii) the quality of the management of each company in which a private equity fund invests; (iii) the ability of a private equity fund to liquidate its investments; and (iv) general economic conditions. Private equity funds that focus on buyouts have generally been dependent on the availability of debt or equity financing to fund the acquisitions of their investments. Depending on market conditions, however, the availability of such financing may be reduced dramatically, limiting the ability of such private equity funds to obtain the required financing or reducing their expected rate of return. Private equity funds, as well as securities that invest in such funds and companies in which such funds or securities may invest, tend to lack the liquidity associated with the securities of publicly traded companies and as a result are inherently more speculative.

All equity investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. Stock of an issuer in a fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. Securities of small and mid-sized companies may entail greater price volatility and less liquidity than investing in stocks of larger companies. This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources Voya Investment Management (“Voya IM”) considers reliable; Voya IM does not represent that such information is accurate or complete. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial data. Actual results, performance or event may differ materially from those in such statements. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Voya IM assumes no obligation to update any forward-looking information.