Gain insight into what is Private Equity (PE). Are you a qualified or accredited investor? Should you be investing in PE?

What is Private Equity

Private Equity (PE) is a type of alternate investment consisting of investing in equities in a company that is not public listed (not traded on stock exchange). The motivation or purpose investing in PE is to achieve positive returns on investment (ROI). Funds are raised from shareholders to be invested. PE investment duration typically is from two to seven years.

Private Equity used to be only for large well-funded private equity firms and qualified investors (see below). Today, PE opportunities are increasingly marketed for  individual investors. However, there has also led to an alarming increase in fraudulent/scam-like PE, and individuals who are unsuited for PE yet investing after being motivated by greed or being convinced by others.

Private Equity Pros & Cons

Pros

  • Higher returns
  • May come with capital protection

Cons

  • Higher risks
  • Not capital guaranteed
  • Not necessarily regulated
  • Higher minimum investment amount versus most other asset classes
  • Exposed to scams or dubious companies

Capital protected means that you are promised to be returned your original investment at the end of the minimum period. However, this protection is not fail proof and may occur situations which leads to a loss of capital (hence not capital guaranteed).

Other Private Equity Risks

  1. Fraud and Misconduct Risk including corruption, bribery, unethical practices, and lack of transparency.
  2. Technology Risk of being outdated, made obsolete, and facing cyber attacks.
  3. 3rd Party Risk by external parties engaged by the company that fail to deliver, or worse.
  4. Compliance Risk of failing to meet laws, rules and regulations.

 

Who can Invest in Private Equity?

PE investments are typically through-

  • Private Equity (PE) firms
  • Venture Capital (VC) firms
  • Pension funds or endowments
  • Angel investors or qualified investors
  • Individual investors

Malaysia Securities Commission (SC) Qualified Investor Definition

A qualified investor in Malaysia must have:-

  • An individual whose total net personal assets, or total net joint assets with his or her spouse, exceed three million ringgit or its equivalent in foreign currencies, excluding the value of the individual’s primary residence; or
  • An individual who has a gross annual income exceeding three hundred thousand ringgit or its equivalent in foreign currencies per annum in the preceding twelve months; or
  • An individual who, jointly with his or her spouse, has a gross annual income exceeding four hundred thousand ringgit or its equivalent in foreign currencies in the preceding twelve months.

US Securities and Exchange Commission (SEC) Accredited Investor Definition

An accredited investor in the United States must have:-

  • Income of $200,000 for singles or $300,000 for joint couples in each of the past two years;
  • A net worth of more than $1 million, not including your home’s equity; or
  • Being an officer, director, or general partner of the company in which you’re investing.

Individual Investors

If you are a smaller individual investor, you have the following options:-

  • Investing through PE firms that may offer a smaller minimum investment – as low as RM30,000.
  • Investing in PE unit trusts, index funds, or shares of listed PE firms.

 

Should you Invest in Private Equity

Before you invest in PE, you need to consider the following aspects:-

  1. Your personal investment portfolio and how does PE fit into your personal investment plan.
  2. Your investment capital availability.
  3. Your knowledge and due diligence on the company:
    • Company Overall
    • Commercial
    • Financial
    • Legal
    • Capital Structure

PE (and other speculative/high risk investments) would be suggested at 5% or below of your entire portfolio. If you have very high risk tolerance and are already fully invested elsewhere, you may consider up to 10% max of your portfolio.

A close alternative with lower capital requirements is social or peer-to-peer (p2p) lending which typically involves smaller companies that PE firms do not want to fund.

 

More Info

 

Note: For educational purposes only. Not a recommendation to invest in Private Equity.