Equity Markets, Valuation, and Analysis

CHAPTER 21Investing in Private Equity

Gaurav Gupta

Analytics Consultant, SRNL International

Tianqi Jiang

PhD Candidate, University of Rhode Island

Zhao Wang

Assistant Professor of Finance, Capital University of Economics and Business

INTRODUCTION

Private equity (PE) is an alternative asset class of particular interest to institutional investors and family offices. PE investments, as opposed to public market investments, are private ownership interests in the equity of private companies or publicly listed companies (Hasan 2014). Investors in PE are typically invested for a 7- to 10-year time horizon. PE falls under a broader category of alternative investments, which also includes real estate, hedge funds, and commodities, among others. Only accredited investors, such as high-net-worth individuals (HNWI) or institutional investors, can participate in PE investments. Such investments are less liquid, require a longer capital commitment, and have a longer time-horizon than the traditional publicly listed asset classes such as equities and bonds. PE investments require more involvement in the invested business from the investor/PE firm. Additionally, an average commitment period is for five years, and an investor must keep cash readily available for any capital calls within this commitment period. A capital call is a request from a PE fund to the investor in a commitment period to advance cash. This capital call usually occurs when a potential deal can be closed or has been closed. ...