Alternative Investments – Private Equity

Alternative In this version of the alternative investments, I discuss investing in Private Equity. Earlier in this series, I discussed investing in Farmland and Rooftop Solar System as alternative investments. Alternative investments can provide lucrative returns that are unavailable by investing via stocks and bonds.

To start off, lets look at what private equity means. Private equity refers to equity capital that is not quoted on a public exchange. The company that you invest in is a private company. Unfortunately, it is hard to invest directly in private companies, unless you are an institutional investor or know the founders/executives of the private company. Most private equity consists of institutional investors or accredited investors who can commit large sums of money for long periods of time. However, even as a small time private investor, it is not impossible to find opportunities. For e.g., the blogger – Asset-Grinder shares his story of investing in a local brewery. Be sure to check it out here. One other way to own part of a private company would be to work for it, where stock options are provided as compensation packages. This is all too common a method especially in the tech industry, where startups include a stock options plan that are vested over a period of few years for employees.

Since investing in a private company is hard and comes with immense risk, the next best option is to go with companies which are institutional investors. These companies are called Business Development Companies, or BDC for short. While there are a plethora of such companies that are private themselves (companies such as Bain Capital and Sequoia Capital), there are some publicly traded BDCs. You can think of these companies essentially similar to venture capitalists, who’s livelihood is to look for investment opportunities and provide funding for growing private companies. Note that private equity and venture capital firms are similar in their target investment, their distinction is merely academic in my opinion. However, for the reason of clarity, I will point you to this website which explains the difference between the two. Profit from the private companies can either be taken by selling the stock or when the companies go public. BDCs tend to make a good chunk of profit on their initial investment for having invested in at an early stage of the company and/or investing in a company that needs financial support. Keep in mind that not all investments work out and BDCs take risks by investing in such startups.

I will not discuss all the publicly traded BDCs in this article and will point you to one of the best resources available on the subject instead. The author who goes by BDC Buzz regularly posts details and his analysis in the BDC space and is a great resource in starting your research. For dividend focused investors, BDCs can be lucrative as some of the companies have a high yield (6-7% is not uncommon) and seems sustainable. Do you invest either directly in private companies or in BDCs? Share your thoughts below as I am interested in learning more about this space and have just started doing some research in the field.

Image Source: Freedigitalphotos.net/David Castillo Dominici

4 thoughts on “Alternative Investments – Private Equity

  1. Hmmm. At first I was about to get riled up about BDCs not being PE lol. But you make a compelling case and I hadn’t thought of it from that angle before.

    I love BDCs. Currently I am in TCPC. I was in PSEC but sold a couple months back or so when it looked like the div was in danger of being cut.

    • PMU,
      I started reading up and discovering the world of BDCs earlier this summer. I am still trying to figure the space out and the newsletters from BDC Buzz are very helpful – even though some of the language used is a bit confusing. But nonetheless, my understanding is getting better as time goes on….it appears that MAIN, PSEC and HTGC are very popular with investors. I noticed that PSEC is due for a dividend cut next spring…so, I will be staying away from that obv…but MAIN looks pretty good. I had a look at their portfolio recently and looks well diversified. I will have to check out TCPC. Thanks for sharing.

      R2R

Leave a Reply

Your email address will not be published. Required fields are marked *