Investments

Unlocking the opportunity

 

Private Equity Made Simple

At its core, Private Equity (PE) refers to investing in companies that aren’t listed on public stock exchanges. These are private businesses, sometimes startups, sometimes established firms, that need capital to grow, restructure, or innovate.

PE investors provide this capital in exchange for ownership or equity, and they often work closely with management to improve operations and boost the company’s value. Once that value is unlocked, they aim to sell their stake at a profit, often through a trade sale, listing the company on an exchange (IPO), or secondary buyout by another PE fund manager.

 

Why consider Private Equity in your portfolio?

 

Higher Return Potential

Historically, PE has delivered higher long-term returns compared to public equities. By getting in before a company “goes public” or before it hits its stride, investors have a shot at outsized gains. Of course, higher returns come with higher risk, but that’s where diversification and professional management play a key role.

 

Diversification

PE doesn’t move in lockstep with the public share market. That means it can act as a diversifier in your portfolio. When markets are volatile, or when listed companies are facing pressure, a well-chosen PE investment may continue to grow behind the scenes. This ‘alternative’ exposure can smooth out overall portfolio returns.

 

Access to Innovation and Transformation

Many PE funds invest in industries that are changing the world such as tech, healthcare, clean energy and more. Being part of that early-stage innovation can be both exciting and rewarding. PE investors often sit at the table where strategy is made, helping companies transform and grow in meaningful ways.

 

The types of Private Equity

PE is an umbrella term that describes a collection of unique strategies such as:

• Venture Capital
• Buyout Equity
• Growth Equity
• Secondaries
• Fund-of-funds
• Co-investments

 

Venture Capital – is a type of PE investment that focuses on funding early-stage, high-potential startups and emerging businesses. These companies are often in industries like tech, biotech, or renewable energy—fields where innovation moves fast but traditional banks might see too much risk to offer loans. Venture capital is a broad strategy that is most frequently divided into subcategories of:

• Seed stage
• Ealy stage
• Growth stage
• Late-stage growth

 

Buyout Equity – is one of the most common and powerful strategies in the PE world. Think of it as buying a business outright (or at least taking a controlling stake), improving it, and then selling it later for a profit.

A buyout happens when a PE firm purchases a mature, established company, often one that’s underperforming, undervalued, or simply has room for improvement. The PE firm typically takes a controlling interest (more than 50% ownership) so they can steer the ship and make major decisions.

The PE firm may look to restructure management, improve the company’s operations or technology, cut costs, expand into new markets or shift the company’s strategic direction. There are generally three types of buyout strategies:

• Management Buyout (MBO): The existing management team buys the company with support from a PE firm.
• Leveraged Buyout (LBO): The PE firm uses a mix of its own money and borrowed funds (debt) to buy the company—this is very common and can amplify returns (and risks).
• Secondary Buyout: One PE firm sells the company to another PE firm.

 

Growth Equity – sits right in the sweet spot between venture capital and buyout PE. It’s like investing in a business that’s already proven itself but needs a boost to go to the next level. It’s a type of investment where a PE firm puts money into a profitable, fast-growing company that needs capital to scale, without the firm taking full control.

Growth equity is about acceleration of an existing company and PE firms typically look for companies that:

• Have solid revenue and customer traction
• Are beyond the risky startup phase
• Want to grow faster—maybe by expanding into new markets, launching new products, or making acquisitions
• Don’t want to give up control to a full buyout

The PE firm usually gets a minority stake, say 10% to 40% and might take a board seat or provide strategic support. But they’re not running the business. They’re backing a management team that’s already doing well, with the aim of turning strong growth into extraordinary growth.

 

The above types of PE investments are examples of Primaries, where the PE Fund invests directly in the company in the first instance (Primary).

 

Secondaries

Refers to the buying and selling of existing private equity investments. Instead of investing directly into a new PE fund or company, a secondary investor purchases someone else’s stake—usually from an institutional investor (like a large pension fund) or a high-net-worth individual who wants to exit early.

Secondary investments can be attractive for investors as they often have:

• Shorter time horizons, since the fund is already partway through its life, there’s usually less waiting for returns.
• More visibility, you’re buying into assets that already exist and have some performance history. It’s not a leap into the unknown.
• Discounted entry, you can often buy in at a lower price than the current value of the investments.
• Diversification, one secondary deal might include exposure to dozens of underlying companies.

Secondary deals can be further broken down to:

• LP Secondaries (Limited Partner) – Buying someone’s stake in a private equity fund.
• GP-led Secondaries – The PE firm (General Partner) wants to extend ownership of a successful company beyond the original fund’s life, so they create a new vehicle and offer current investors the chance to cash out or roll over.

 

Fund-of-Funds

This is a fund that invests in other PE funds rather than directly in companies. So instead of picking one or two PE funds yourself (which can be risky, time-consuming, and expensive), you invest in a fund-of-fund, which then spreads your money across multiple PE funds, each of which holds a range of companies.

You’re not investing in companies directly. You’re investing in a portfolio of PE equity managers who invest in those companies.

The benefits of a fund-of-fund approach can be:

• Diversification – Your money is spread across multiple funds, reducing the risk of any single fund underperforming.
• Access – Some fund-of-funds can get into elite funds that individual investors couldn’t access on their own.
• Expertise – Professional managers select and monitor the underlying funds, so you benefit from their due diligence and ongoing oversight.
• Smoother returns – With different funds at different stages (some just starting, others maturing), the cash flows can be more predictable over time.

 

Co-investments

This is when an investor (like a super fund, family office, or high-net-worth individual) invests directly into a specific company alongside a PE firm—but without going through the PE fund.

So instead of putting money into a general PE fund that spreads capital across 10–20 companies, you’re investing in one specific deal that the PE firm has already sourced and vetted. You’re effectively “riding shotgun” with the PE firm on a particular transaction. The drawback can be large minimum investments in the tens of millions.

 

Considerations when investing in Private Equity

 

While investing in private equity can be rewarding, like anything with the potential for high returns, it comes with risks. Let me break down the key risks for you in a way that’s practical and relevant:

Liquidity: Private equity tends to be a long-term, relatively illiquid investment because a strategy can take years to play out, requiring capital to be locked up for long periods of time. The asset manager controls the investment decisions and may only be able to exit the partnership in a secondary market that may have limited buyers, if any, or at a discount to the stated value. Newer PE funds are now offering monthly or quarterly liquidity thereby reducing the liquidity concerns.

Manager Selection and Access: Private equity returns can be somewhat dependent on access to deals with strong potential and the ability of a manager to add value. This can make due diligence when selecting managers, in terms of their track record, experience and access to deal flow- an important part of the private equity investment process. It also can create significant investor demand for the top-performing managers.

J-Curve: Private equity investments tend to follow a pattern called the J-curve, where they will produce negative cash flows in the early years, due to capital calls and management fees paid before there is a chance for the investment to generate returns. It may take several years until underlying investments are marked up to their current value or achieve gains realized through exit transactions.

Volatility: Private equity investments tend to be valued only periodically by the owners of the company, as opposed to public equity investments which are valued daily or in real time. This can make private equity investments appear less volatile in a portfolio but should not be confused with potential underlying volatility in the real value of the asset.

Business Risk: All stages of private equity investments come with some level of business risk. For example, a business at the venture capital stage may not prove to be viable or competitive; in buyout or distressed transactions the company may not be able to successfully restructure to add value.

 

 

Andrew Aylward is Chief Investment Officer at Keep Wealth Partners.

For more information contact us on 03 8610 6396

Keep Wealth Partners Pty Ltd (AFSL 494858)

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from a financial planner who can consider if the strategies and products are right for you.