Share This Article
How to invest in startups through Private Equity
Private Equity is a type of wealth management through investments in alternative financial instruments. It refers to investments in companies whose shares are not traded on the stock exchange. Most often, these include start-ups, real estate, and the purchase of gold.
Participants in the PE market include various categories of people, such as business angels or those who want to help their relatives or friends with their projects. PE funds are also representative of this sector. Some may specialize in certain areas, while others prefer to choose an investment object based solely on its attractiveness. A separate category is PE firms, which act as management companies and collect money for the fund. They select targets for investment and conduct the process of buying out the controlling stake in the startup using the LBO mechanism. In addition, PE firms can participate in acquiring public companies, which leads to the delisting of their shares.
For private businesses, cooperation with Private Equity funds is a way to increase their capital and receive funds to develop a new product. This option is used when the founder of a company wants to sell their stake.
On average, funds of this type live about 10-15 years. They close at the moment when all the assets in the portfolio are liquidated. Liquidation does not mean closing the company but selling it to other investors or listing it on a stock exchange.
Venture capital market
According to Crunchbase analysis, the venture capital market is down 35% in 2022 compared to the previous period. The reason for this was the global crisis, which slowed the market and led to a revaluation of companies. The value of large corporations fell, but undervalued startups also emerged. These are the ones Private Equity is targeting.
In times of crisis, more than ever, private companies need an influx of capital to develop their ideas. At the same time, such projects produce innovative products that contribute to progress. By investing in companies in the PE market, there is an opportunity to join a startup at an early stage of its development and receive a significant profit in the future. However, it is also essential to consider that about 90% of new companies fail, which means there is always a risk of losing your investment.
Investments in real estate or gold are considered safer in Private Equity. However, one should not expect super profits here, as can be the case with startups. PE funds offer several investment options and assess the risks and level of return for each, which can help you choose the best instrument.