When you are out in the market purchasing goods and services, has the thought of where these services come from ever crossed your mind? Even if you are purchasing a bucket of French fries from McDonald’s or a loaf of bread from your nearby supermarket, there is direct or indirect involvement of private equity firms in all these products.
Understanding private equity
Private equity, abbreviated as PE, is a financial aspect of a business. For established businesses, PE funds help with exchanging funds for equity shares. In PE, an interested party invests a significant amount of money into a business and gets a share of the company in exchange. The private markets have been knitted closely into the financial world through private equity funds. The top real estate private equity firms in the USA form an alternative set of investments, like real estate. Since these assets come under the more contemporary investments, their presence in the public market as traditional stocks is almost zero.
PE firms and investors
A PE firm is based solely on investments. They readily invest in enterprises that seem fit for them and help in boosting their values, eventually. When the value of a company they invested in increases, the firm stands to gain a lot more profit in the future. The firms work with the support of a few partners who are keen on investing in growing companies.
Once the investment is done, the firm gets up to half of the proprietorship of the company. Sometimes, this can be even over 50%. With these gained rights of many companies simultaneously, the firm creates a portfolio.
A private equity investor is someone who invests in companies in association with a PE firm. They are duty bound in developing a desirable capital to invest. The PE fund is set at a desirable goal, and when it is reached, investments begin.
Real estate investor and PE
If you are a real estate investor, having a portfolio company to your name can be quite a credit. It presents an opportunity for investing in real estate. The PE fund gathered from external investors is used in fuelling the growth of properties which have the potential to grow further. The properties are acquired using PE, modified, and resold in the market for a higher stake. This way, all the investors stand to earn a better return. A major feature of PE in real estate is that the complete process is carried out with a long-term goal and may take up to several years.
Benefits of private equity real estate investments
PE real estate investments have a lot of advantages. Like any common investment opportunity, PE also comes with its risk. But the advantages it offers are worth the risks associated with acquiring a few portfolio companies.
- Returns: Investments are often associated with huge returns. Private equity real estate investments are no different in this regard. The returns are substantially huge because of the companies procured with the investments gathered as equity funds.
- Diverse assets: A firm invests in companies of different types. The asset within the firm is diversified because of the presence of multiple portfolio companies. This also helps to expand the profits because even if one set of markets experiences a downfall, a different investment may become profitable.
- Easy to handle: Even if a person who does not have in-depth knowledge of investments wishes to indulge in a PE firm, they can do so without worrying too much. The PE firms manage the asset handling for all the involved investors. So, the investors have to only make a little effort in this regard.
Types of firms
PE real estate firms can be core, core plus, value-added, or opportunistic. A core firm involves less risk than other firms do. They invest in top-notch matured companies, hence guaranteeing returns. A core-plus firm presents with more returns than the former type, with added risk, which is still less than value-added firms. If an investor is daring enough to risk his assets, opportunistic firms are the best suitable type. They often invest in lands that are not doing well, hoping to improve them. Even though the risk is maximum, returns are equally huge with these investments. The top real estate private equity firms in the USA are categorized into these four types. An investor can choose to be a part of these firms based on the risk they are willing to take and the returns they are aiming for.
The Bottom Line
Investments are profitable ventures that are replete with risks. It is important to get to know the field before giving huge amounts of money at stake. You must realize the pros and cons involved in the entire process. Once you get the lay of the land, investments will be a walk in the park for you.