Would you like to invest in private equity and get information about the German market? Then read more about it in our most recent Private Equity Investor Brief.
The capital in private equity funds typically stems from institutional investors such as insurance companies, banks and pension funds. These institutions all collect money from their customers and pool it before investing it on the capital market. Pension funds and insurance companies collect monthly contributions from employees or customers, and banks accept deposits into the savings accounts of their customers. This money must then be invested smartly, because customers expect a certain level of interest.
One possible place to invest for these professional investors is private equity funds. Globally, pension funds in English-speaking countries as well as Asian countries play the most important role in private equity funds. They invest the funds entrusted to them on the capital market in order to achieve as much growth as possible for the pensions. In Germany, there are comparably few pension funds due to our retirement system financed by apportionments. Private equity funds in Germany must therefore obtain their capital to a great extent from foreign investors.
The investment period for private equity investments is typically ten years. The investors commit to making their subscribed capital available to fund managers “upon request”. This occurs when the private equity firm finds a company in which it would like to invest. With the capital from institutional investors, private equity firms purchase shares of companies (not listed on stock exchanges) that they believe will grow and increase in value when given the necessary capital and the underlying expertise of the private equity firm. Once this has been achieved within (on average) four to seven years, the companies, or the shares held, are sold at a profit or offered on the market. The initial investment is first paid back to the investors out of the revenue from the sale. If there has been a return on the investment, then this also goes to the investors. The yields from private equity therefore ensures the retirement of many employees and the services owed to many insured people. If the fund ultimately achieves a certain minimum interest rate, then the private equity managers also receive a portion of the profits, since they have also invested their own capital in the fund.
Private equity listed on a stock exchange – so-called listed private equity – represents a possible way for private equity firms to raise capital from private and institutional investors which is ultimately invested in companies. So the market is used as a source of capital: investments in private equity funds or companies are carried out via exchange-listed vehicles. The investment focus is on the various private equity segments such as buyouts, venture capital and mezzanine capital.
In contrast to “classic” private equity, listed private equity offers the investors increased liquidity and/or trade flexibility via the exchange-traded shares – they can sell their shares at any time on the market. Additionally, management fees and minimum investments are significantly lower than with non-listed private equity investments, which typically are only intended for institutional investors. Listed private equity may be able to offer investors a high yield, but the risk is therefore also relatively high. That is why – as is the case with “classic” private equity – only professional investors should invest in listed private equity.
There are around 250 exchange-listed private equity firms worldwide – most of which (approx. 150) are in Europe. There are about 50 names each on the stock lists in Asia and the Americas, and another ten in other parts of the world. More than three-fourths of exchange-listed private equity firms invest directly. However, there are also companies that have a dual strategy of direct investment and establishing funds – such as Deutsche Beteiligungs AG – or that invest directly and in other funds – such as 3i Group or GIMV.