Private equity (PE) investments are not listed on public markets. With money from institutional and individual investors, PE groups buy companies that they want to refurbish and turn around – hopefully for a hefty profit. Since this asset class became popular in the 1970s and 1980s, PE’s patient, long-term approach to investing has typically outperformed other sectors during a downturn, posting some of its best returns after a recession. Here’s how to act more like private equity to overcome the market’s rocky spots.
How private equity deals with bad markets
Private equity firms adhere to a long-term investment strategy, averaging about five years. They continue to invest in turbulent times and do due diligence quickly enough (will this company add value?) to capitalize on the kind of short-term buying opportunities that create economic lows. By buying steadily when other investors stay away, PE can acquire promising assets at a bigger discount.
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Like PE companies, individual investors can also make long-term strategic decisions. Sticking to a regular investment schedule and staying diversified, even in a volatile market, offers investors the opportunity to buy into strong companies that may have simply been dragged into attractive values alongside the rest of the market.
In addition, PE groups cannot have their investments paid out quickly or easily. That keeps private equity firms from panic selling; they tend to hold their investments through rough markets. Investors in the public market can benefit from the same patience and discipline.
What Private Equity Can Do That You (Maybe) Can’t
Private equity funds know how to keep cash on hand in different economic climates, giving them plenty of “dry powder” to use to close deals. If they need money to seize a short-term opportunity, they don’t necessarily have to worry about borrowing when interest rates are higher. This strategy can be harder for individual investors to imitate, and requires planning (tracking income, expenses, and savings). But if you’re low on debt and set aside a money fund that you can tap into when you need it, you can follow PE by acting quickly when an opportunity presents itself.
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 identify opportunities that may not be apparent to the layman. Investors, here it pays to have access to knowledge; it is important to do your own research and due diligence before jumping into an investment.
Why private equity may not always win
Recently, private equity investment opportunities have declined and the values at which private equity groups sell companies have fallen, with further declines likely in the coming months. It remains to be seen whether PE will weather this downturn again and maintain its overall outperformance against the public markets.
In the meantime, try not to act on your fears during an economic downturn. Instead, take the same steps that led private equity through past stock market storms: focus on the long term, stick with investments you believe in, and look for new opportunities when the market trades at a discount.
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