Investing in private equity is very popular amongst accredited investors because it allows you to both become part of the company and to watch a new company grow and develop.
However, private equity investing also comes with significant risks. It is entirely possible that you could choose a company that fails and see significant losses. When it comes to investing in private companies, there are a few steps that you should follow to avoid risk. Follow these tips for more secure investing in private equity.
Minimizing Management Expenses
There are various ways to invest in private equity, and many of them come with fees. If you work through a private equity firm, they will charge a management fee for your investments. You can also use a funds of funds type of investment, which means that a firm will hold all of the shares of multiple private partnerships that have invested in private companies. While this can diversify your portfolio, you will also need to pay added fees to the manager of the funds of funds. Finally, you can also invest in private equity through an ETF. This will also add more management expenses and potentially brokerage fees. To avoid fees, do your research about the firms you are working with.
Diversifying Your Portfolio
The best way to minimize risk in private equity investing is to diversify your portfolio. Investing all of your capital in just one company can lead to major losses if that company does not succeed. However, by diversifying your portfolio and spreading your investment capital across multiple private companies, you will increase your chances of finding a company that performs incredibly well and brings significant return.
Watch for SEIS/EIS Badges
When investing in a private company, you should always ensure that the company has an SEIS or EIS badge. This badge means that the company in question could enable you to claim up to 50% of the amount that you invested on your income tax. Being able to claim that amount of money is a significant advantage for you. Furthermore, you will not have to pay capital tax gains if your investments sell in the future.
Understanding the Risks
Most importantly, you need to understand the risks of investing in private equity. Because private companies are not traded on the public stock market, you will not be able to simply sell your shares if the price drops. Before investing, always discuss the company’s exit strategy to find out what will happen to your investment if it fails. Do your research about every company you invest in, and you will minimize your risks.