Understanding Private Equity Funds

By | May 11, 2020

Private equity funds are those funds that generally directly invest in companies. They purchase shares in private companies and even publicly-traded ones as well. Private equity accounting services are companies that help in managing the portfolios of private equity fund stakeholders.

These private equity funds seek to acquire controlling interests in private companies. Once they have been acquired, experts are then signed on to facilitate better management and improvements. These funds employ a number of strategies that can improve any company.

Imagine you have a business that’s selling shoes, and you’re doing well. You would like to grow and expand the business, right? In that case Roth 401(k) may help you.

By approaching a private equity fund stakeholder, you’re asking them to give you a sum of money in return for a percentage of shares. You use their money to grow your portfolio – maybe invest in stocks? Maybe make enhancements in the material you’re using for your shoes? Or maybe start another vertical within your company? Whatever it is, it must lead to better sales. 

As your sales increase, the private equity stakeholder’s revenue increases as well, as he has a percentage stake in your brand. Once it reaches a point where your sales break even with the amount they’ve invested, anything extra becomes a profit for them, and they can withdraw whenever they want. 

There’s great potential – returns in most private equity funds can range between 22 and 24% annually! 

Private funds v/s hedge funds –

Hedge funds are those investments that contain pooled funds, and they invest in different assets and securities to achieve higher returns for investors. A hedge fund must earn as much as possible in the shortest time frame. The portfolio includes options, stocks, derivatives, bonds, as well as contracts in the future. Borrowed funds and leverage are often employed to magnify returns as well. 

When it comes to private equity funds however, they are a bit different than hedge funds as they are focused more towards long-term strategies. They work towards maximizing profits and improving investor returns as they partly-own these companies under them, in the form of stocks. The business will have an agreement that pays dividends to private equity funds, with the profits being handled by private equity accounting services.

Think of them as giving you money when you’re in your nascent stages, showing promise and you return it to them multiple fold as a gesture for their belief in you.

Last year alone saw close to $450 billion being spent by private equity funds, so you know there’s massive potential in it. 

Private equity funds are similar to venture capital firms, and these are funds that invest in certain private companies that have great potential for growth. Most venture capital funds involve investments in start-ups and private equity funds invest directly in those private companies. 

Investments in private equity –

Private equity funds can create investment structures that are complex and limit tax burdens. There may be controls put in place or need to be put in place to reduce the risk of tax and some structures might need to be adjusted as time goes on. 

The agreements which private equity funds have with the companies they invest in also makes a big difference. Private equity funds invest in businesses in the form of both debt and equity, the former acts as a type of loan for the invested company. 

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