Benefits and risks of investing

Before investing in a private equity fund, an investor should carefully weigh the benefits against the potential risks involved. As private equity may involve significant investment risks, there are stringent guidelines determining an investor’s eligibility to invest in these vehicles.

Most private equity funds are offered only to institutional investors and high net worth individuals with substantial assets and who have had experience with sophisticated investments. Investors must be able to commit large amounts of capital for a long period of time, and recognise that their assets will be illiquid, as these ventures are generally long term and/or volatile in nature, and there is no public market for the funds. Finally, investors must be able to bear the risk and potential of losing their entire principal investment.

Benefits

Private equity investments provide access to specialised investment managers.
Private equity investments typically seek higher absolute and risk-adjusted returns.
Since private equity investments typically demonstrate a low correlation with traditional stock and bond investments, they may provide investors with:
- Enhanced diversification
- The potential to lower overall portfolio volatility, thereby helping manage risk
- The potential for downside protection during varying market conditions.

Risks

Risks include:

Limited marketability and transferability
Illiquidity (lock-ups of 12 or more years)
Complex tax considerations
Lack of regulatory oversight and protection
Delayed or limited valuation information.