How private equity can teach you how to withstand recessions | Personal finance
Private equity (PE) investments are not listed on public markets. With money pooled together from institutional and individual investors, private equity groups are buying up companies they want to fix and turn around – hopefully for a big profit. Since this class of investing became popular in the 1970s and 1980s, PE’s patient, long-term approach to investing has generally outperformed other sectors during downturns, posting some of its best returns after a recession. Here’s how acting more like private equity can help you navigate market challenges.
How Private Equity Handles Bad Markets
Private equity firms follow a long-term investment strategy, around five years on average. They continue to invest during turbulent times, quickly doing their due diligence (will this business add value?) to act on the kind of short-term buying opportunities created by economic depressions. By buying regularly when other investors stay away, private equity can acquire promising assets at a deeper discount.
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Like private equity firms, individual investors can also pursue long-term strategic decisions. Sticking to a regular investment schedule and remaining diversified, even in a volatile market, offers investors the opportunity to invest in strong companies that may simply have been driven to attractive values alongside the rest of the market.
Additionally, private equity groups cannot quickly or easily cash out their investments. This prevents private equity firms from panic selling; they tend to hang on to their investments through tough markets. Investors in public markets could benefit from similar patience and discipline.
What Private Equity Can Do That You (Maybe) Can’t
Private equity funds know how to keep cash on hand in a variety of economic climates, which gives them plenty of “dry powder” to use to influence deals. If they need money to take advantage of a short-term opportunity, they don’t necessarily have to worry about borrowing when interest rates are higher. This strategy may be more difficult for individual investors to imitate and requires planning (tracking income, expenses and savings). But if you have low debt and set aside a cash fund that you can tap into when you need it, you can track PE by acting quickly when the opportunity arises.
Private equity firms also have access to people with experience and expertise. Focused, value-creating teams and sector specialists who work exclusively on a portfolio are able to analyze market cycles and find opportunities that may not be apparent to the retail investor. Investors, this is where it pays to have access to knowledge; it is important to do your own research and due diligence before embarking on an investment.
Why Private Equity Doesn’t Always Win
Recently, the number of private equity investment opportunities has declined and the values at which private equity groups are selling companies have declined, with further declines possible in the coming months. It remains to be seen whether the PE will once again withstand this decline, maintaining its overall outperformance against the public markets.
In the meantime, try not to act on your fears during an economic downturn. Instead, follow the same steps that have seen private equity weather previous stock market storms: focus on the long term, stick to the investments you believe in, and look for new opportunities when the market is trading at a discount.
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