Private equity as an important pillar of any multi-asset strategy
For a long time, private equity or investments in private equity were considered the domain of institutional investors. However, numerous private asset strategies and alternative investments are now also available to private and retail investors. They can offer an optimised risk/reward profile compared to traditional investment options. Find out why private equity plays an important role in wealth creation and which investment opportunities retail investors should be aware of.
What is private equity?
Private equity is the English term for over-the-counter equity or private equity. Investors or private equity funds or funds of funds buy shares of unlisted companies. The aim is to optimize business processes and increase company value and return.
Private equity is the generic term for a series of investment strategies that cover various phases of setting up and managing a company. Venture capital (venture capital), for example, is an early form of investment in very young companies. A distinction is made between seed financing, start-up financing and early expansion financing.
There are also various financing models for established companies that pursue different goals depending on when they invest. For example, growth financing, special financing such as support for turnaround or the spin-off of parts of large corporations (buyouts or spin-offs).
Private equity is called Alternative investments assigned. It has grown rapidly over the past two decades and still has a lot of potential: By the end of 2025, alternative assets under management should be Volume of 17.6 trillion US dollars achieve.
Private equity as a component of portfolio diversification
But where does the increasing interest in private equity as part of asset allocation come from? The basic idea of every successful investment is the principle of risk-opportunity optimization. In other words: diversification. The Nobel Prize winner Dr. Harry Markowitz He once said: “Diversification is the only free gift when investing.” In the 1950s, he founded modern portfolio theory and was able to quantitatively prove for the first time that portfolio diversification makes a decisive contribution to financial success, as broadly diversified investment portfolios show higher returns combined with lower risk.
Which asset classes are selected depends primarily on the investor's risk profile and liquidity. The range of available investments ranges from fixed-income securities and bonds to individual stocks, funds and certificates to derivatives, tangible assets and: private equity. In order to achieve optimal diversification, individual investments should correlate as little as possible or react as differently as possible to market developments.
For example, government bonds and stocks often have a negative correlation: If the value of one type of investment rises, the value of the other falls and vice versa. In contrast, traditional tangible assets such as realty or arts Mostly largely independent of stock markets, and gold has always served as a “safe haven” when securities prices fall.
For a successful rebalancing of the portfolio, private equity is therefore on the agenda of institutional and private investors. Between February and March 2021, Schroder Investment Management surveyed as part of Institutional Investor Study 750 institutional investors worldwide on their attitude towards private market investments. This revealed that 90 percent of the major investors surveyed plan to increase their allocation in this segment over the next twelve months.
The private equity asset class now comprises a variety of strategies with different return factors and risk profiles. According to the study, “high returns” are therefore the second most important motive for private equity investments after “improved diversification.”
Private equity strategies: venture capital, growth equity, buyouts
But private investors can also invest in private equity in various ways: in companies directly, via funds, funds of funds and digital investment platforms. There are essentially three private equity strategies: venture capital, growth equity and buyouts. These do not compete with each other, but are based on the life cycles of the respective investment object.
- Venture capital
In the “venture capital strategy,” private equity companies invest in newly founded or young companies or start-ups and provide them with equity capital.
- Growth Equity
This involves buying shares of existing and established companies on the market. The aim is to increase company value through operational improvements.
- buy-outs
Buyouts are the most advanced private equity strategy in the corporate life cycle. This is understood as the majority or complete takeover of a company by a private equity company. After a certain holding period, the exit takes place, for example, through an IPO or a sale of the investment to an investor.
Private equity risks and new opportunities for small investors
Private equity as a component of portfolio diversification is now also becoming increasingly important for private market investors. However, retail investors should be aware of the risks associated with private equity funds or funds of funds. These include: The possibility of a total loss in the event of corporate insolvency, high costs and fees, sometimes opaque investor communication and long terms of ten years or more.
However, private investors do not have to forego meaningful portfolio diversification involving private equity. Investors can use specialized, digital platforms to make small amounts invest in assets that were previously reserved only for institutional investors — and with full transparency, low fees and a high level of flexibility.
