7 Must-Have Strategies for Every Private Equity Firm

Buy low, sell high. Sound familiar?

Perhaps the most-accredited motto of private equity, it still stands today as the main goal of firms that invest in nonpublic companies—and rightly so. Private equity funds are conceivably among the most malleable and least-regulated investment types, giving them some of the highest potential for earning huge returns.

However, with high returns come high risks—for one, investing in private equity requires commitment, both fund-wise (up to $50 million – $1 billion for a leveraged buyout, for example) and time-wise (often 7-10 years). Plus, there’s no single way to get to your end goal. There are many different approaches to financing capital growth, so you must have highly-intuitive team members at your side to gauge the company’s, your partners’, and your specific needs.

This includes things like the stage at which the investment is taking place, the fund’s target geography and sector, the value you’d add to the fund, and most importantly, your exit strategy (no returns would be earned otherwise).

These components make up the ingredients list for how you should form your investment strategy. While some strategies are more popular than others (i.e. venture capital), some, if used resourcefully, can really amplify your returns in unexpected ways.

Here are our 7 must-have strategies and when and why you should use them.

1. Venture Capital

Venture capital (VC) firms invest in promising startups or young companies in the hopes of earning massive returns. VC usually takes place in specific fields, especially technology, and funds go towards research, building prototypes of new products, etc.

Because these new companies have little track record of their profitability, this strategy has the highest rate of failure. All the more reason to get highly-intuitive and experienced decision-makers at your side, and invest in multiple deals to optimize the chances of success.

So then what are the benefits? Venture capital requires the least amount of financial commitment (usually hundreds of thousands of dollars) and time (only 10%-30% involvement), AND still allows the chance of huge profits if your investment choices were the right ones (i.e. Apple, Google, Facebook).

2. Growth Equity

Growth equity firms target more mature, fast-growing companies that have had some proven success, but still need funding to expand and reach their full potential. This might mean funding an acquisition or the development of a new product, so the investment usually ranges in the millions of dollars—ideally, the initial investment would come back to the firm when the company increases their revenue in a short span of time.

The benefit of this strategy is that involves much less risk, and isn’t (too) expensive. However, it requires much more involvement on your side in terms of managing the affairs. One of your main responsibilities in growth equity, in addition to financial capital, would be to counsel the company on strategies to improve their growth.

3. Leveraged Buyouts (LBO)

Firms that use an LBO as their investment strategy are essentially buying a stable company (using a combo of equity and debt), sustaining it, earning returns that outweigh the interest paid on the debt, and exiting with a profit.

The biggest benefit of an LBO is that you’d get huge return with risking only a small amount of your money, since the raised debt usually covers 50%-80% of the purchase price. Risk does exist, however, in your choice of the company and how you add value to it – whether it be in the form of restructure, acquisition, growing sales, or something else. But if done right, you could be one of the few firms to complete a multi-billion dollar acquisition, and gain massive returns.

4. Distressed Private Equity

Aka “special situations,” this strategy involves a PE firm earning profits by assisting a company that is undergoing certain challenges—maybe the company is dealing with unruly expenses, a merger and acquisition, a major competitor, bankruptcy proceeding, or a failing capital structure.

Since a distressed company could be easily acquired in certain cases, this strategy could mean great investment opportunities.

5. Real Estate

A leveraged buyout (using debt plus equity), but instead of acquiring a company, you’re buying a property. However, while LBO’s are generally low-risk, the risk level of real estate private equity solely depends on how much chance you’re willing to take. There are four main approaches to real estate PE:

Core Plus
If you want high returns, the two worth noting are value-added and opportunistic strategies. Value-added is considered medium risk (with medium returns), and involves gaining profit by improving a property in terms of physical repairs and management, while opportunistic involves higher risk (with higher returns) and requires courageous amounts of enhancements.

6. Funds Of Funds (FOF)

Instead of investing directly into a company’s security, PE firms can invest in an another, already-existing PE fund. Most importantly, this allows for immense amounts of diversification in your investments and strategies, but it also means that individual investors can invest via FOFs, and that the investments are more liquid.

The only downside is that FOF investors have to pay pay two layers of fees: one to the fund manager, and one to the FOF manager.

7. Infrastructure

Perhaps the most competitive amongst fund managers, infrastructure funds are investments in public foundations, i.e. utilities, roads, bridges, public transportation. While conceivably low-risk, infrastructure also offers investors the most opportunities and geographies to diversify their portfolios—there are always emerging markets, and therefore a constant demand for new infrastructure.

Next Steps.
Each of these investment strategies has the potential to earn you huge returns. It’s up to you to build your team, decide the risks you’re willing to take, and seek the best counsel for your goals.

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