Characteristics, Risks, and Risk Mitigation Approaches for Alternative Asset Classes
Jai Parihar
Private equity investments usually produce negative returns in early years and positive returns as the portfolio of companies matures Private equity refers to an equity investment in an entity or asset not publicly traded on organized stock exchanges. The three most common investment strategies are as follows (figure 4.64): Leveraged buyouts: acquisitions of another company using a significant amount of borrowed money (bonds or loans)—usually a 90 percent debt to 10 percent equity ratio—to meet the cost of acquisition Venture capital: funds pooled from various investors with a goal of acquiring a diversified portfolio of private emerging companies with perceived long-term growth potential Distressed investing: acquisition of equity or debt of operationally sound companies in financial distress Figure 4.64 Share of Private Equity Market by Fund Type Capital growth Mezzanine capital 2% 1%
Distressed debt 11% Venture capital 15%
Buyouts 71%
Source: Russell Investments.
Mechanisms used to invest in private equity include funds, funds of funds, and principal investments. Private equity investments represent a large universe of investable assets and provide diversification to a traditional stock and bond portfolio. They also give investors the ability to obtain control and influence 305