An asset category is anything that someone may put money into.
Private equity is comparable to shares as an asset category. But, instead of simply buying a few shares of stock, the purpose is to purchase whole companies outright. The normal return goal for these investments is roughly 20 percent-30% annually (real industry yield historically is somewhere around 15 percent).
Now let us take it a step farther. Within each asset class, you can find asset class classes, or sub-classes. As an example, stocks can be classified into national and global stocks. In the same way, private equity could be classified into leveraged buyout (LBO) and venture funds. LBOs, as explained above, are mainly what you ought to think of when someone mentions the word private equity.
Venture funds, on the other hand, is not the same investment strategy that entails making equity (ownership) investments in insecure, early-stage businesses to finance their own development. These investments are usually centered on the engineering and health care segments since they have the lowest barriers to entry (any fool can start a site… ). The returns can be tremendous – believe putting in on the ground floor in Google, which Sequoia Capital failed in 1999 – but the danger of failure could be even larger. Venture capital investors typically aim a yield of anywhere from 30 percent-50 percent yearlyhowever, because of the high rate of total failure, the true industry yield over the previous ten years is near zero!) .
That is it. Probably does not appear all that difficult, particularly given the possible yields. But how do you put in on it? Well, the answer might be that you already are. Purchasing an whole company requires a whole lot of cash, so when private equity companies raise money, they generally seek out just the biggest investors. These are known as institutional shareholders and include banks, insurance companies, corporate and public pension funds, university endowments, as well as some nations’ federal treasuries (called autonomous wealth financing). So whether you are a government worker or Ford line employee contributing to a retirement, a student or professor receiving financing from a college endowment, a worried parent investing in cash value life insurance, or even a taxpaying citizen of Australia, you likely are a private equity investor!
Unfortunately, that is probably as near as ordinary individuals can get to private equity investing. Smaller private equity companies will find wealthy investors (known as high net-worth individuals, meaning that their total assets excluding primary residence exceed $1 million), but companies are legally banned from approving everyone else since the government believes them to become fiscally “unsophisticated.”