Private Capital: A Concise Overview for Investors

Private capital, a term that has gained prominence in the financial sphere, signifies a collection of investment approaches that primarily focus on private assets. This type of investment stands in stark contrast to publicly traded assets such as stocks and bonds. In this article, we shall delve deeper into the world of private capital, examining its structure, various strategies, and why it has become a preferred investment choice for many institutional investors and ultra-high-net-worth individuals.

‍Defining Private Capital

In simple terms, private capital refers to funds invested in companies that are not publicly traded. This includes various strategies or asset classes such as private equity, venture capital, private credit, real estate, and infrastructure. These funds are typically organized as limited partnerships, with investors referred to as Limited Partners (LPs) and the fund managers known as General Partners (GPs).

The Structure of Private Capital Funds

Private capital funds, usually managed through a closed-ended fund structure, encompass one or more private capital strategies. Those who manage these funds (GPs) target investors (LPs) as they raise capital. These investments are generally not accessible to the average retail investor due to the high minimum investment required, which often ranges from $5 million to $25 million.

Fundraising and Investment Period

In the initial phase, the GPs prepare to launch a new fund, embarking on a fundraising process. They seek out large institutional investors and ultra-high-net-worth individuals to commit capital. Once the fundraising period ends and the investment period kicks off, the GPs start seeking and conducting deals aligning with their fund's strategic plan.

Value Creation and Wind Down

Over the fund's lifetime, the GPs issue capital calls to investors to draw on their committed capital to finance these deals. In the case of private equity and venture capital, they create value in these assets through operational changes, mergers and acquisitions, divestments, or restructuring. As the fund begins winding down, the GPs exit from their investments, generating returns to be dispersed to the LPs.

‍Types of Private Capital

Private capital is a broad term representing multiple strategies that asset managers use to set up funds, attract investors, and invest in private assets. The main private capital strategies include:

Private Equity

Private equity involves investing in mature businesses by acquiring equity or ownership in the business itself. The private equity manager oversees value creation within the business through restructuring, operational improvements, and other strategies.

Venture Capital

Venture capital, a subset of private equity, focuses on investing in early-stage companies, particularly in the technology industry. It generally involves smaller investments due to the higher risk associated with early-stage companies.

Private Debt

Private debt, also known as private credit, involves making loans to businesses needing capital. Private debt managers generate returns via scheduled interest payments and repayment of the original principal.

Real Estate

Real estate investment managers raise capital to invest in real estate properties. They generate returns by developing new properties, operating and improving existing ones, and then selling them.

Infrastructure

Infrastructure investment managers invest in physical asset projects such as roads, bridges, or energy infrastructure. These investments are generally seen as low volatility asset class as they often tie to macroeconomic factors like inflation or population growth.

Growth of Private Capital

Private capital has witnessed impressive growth over the past few decades, its popularity surging after the Global Financial Crisis of 2008. As traditional investment vehicles became unattractive due to public markets' volatility and near-zero interest rates, private capital emerged as a haven for investors. Today, the total value of the entire private capital market exceeds $7 trillion.

‍Private Capital vs. Alternative Investments

Private capital is a subset of alternative investments. The term "alternatives" could cover any asset that serves as an alternative to listed stock or fixed income, such as cryptocurrency or collectibles. However, private capital refers specifically to the funds offered by investment managers that pursue one or more specific private capital strategies.

‍Private Capital vs. Private Equity

Although often used interchangeably, "private capital" and "private equity" are not identical. Private equity is a subset of private capital. However, private equity is by far the largest and most popular private capital strategy, and the industry has tripled in size over the last decade.

Conclusion and Key Takeaways

Private capital offers a range of investment opportunities that can yield high returns. However, the complexity of the investment strategies and structures requires a deep understanding of the financial landscape and the ability to navigate it effectively.

• Private capital refers to funds invested in private assets as opposed to publicly traded ones.
• Private capital funds are usually managed through a closed-ended fund structure.
• The main private capital strategies include private equity, venture capital, private debt, real estate, and infrastructure.
• Private capital has seen impressive growth over the past few decades, particularly after the Global Financial Crisis of 2008.
• Private capital is a subset of alternative investments, while private equity is a subset of private capital.