Private equity is growing in popularity with single investors. The lure of potentially massive returns is enticing. However, the performance of your investment typically depends on the firm.
With so many options, how do you know if you’re partnering with the right private equity firm in Houston? To help ensure your investments are working to meet your financial goals, here are a few things to consider before choosing a private equity manager.
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The Equity Firm’s Track Record
What is the manager’s track record? This is one of the first factors to consider. Thankfully, it’s also one of the easiest to research. A key component to look at is the manager’s benchmarks, and this includes reviewing their loss and return ratios.
Since investment performance is often influenced by several factors, you should plan on taking into consideration the following:
- The sector. This is the industry/field. For example, is private equity in healthcare or manufacturing?
- The investment manager’s strategy
- The location/geography of the business.
- The amount of the equity return check compared to the initial investment
- The market environment. How the market performs overall can impact private equity investments.
Don’t forget to check the fund’s vintage year, which is the year the fund is launched. The economy can be weaker in one year than another, affecting the fund’s performance. In weaker economies, even an effective money management strategy can struggle to meet investor expectations. The lower return isn’t always due to a poor investment strategy.
How Is Value Created
This ties into the manager’s track record—how are they creating value with their previous clients’ funds? Most private equity firms use three drivers to create value.
- Multiple Expansion: This occurs when the manager is selling the portfolio companies for more than the acquisition price.
- Financial Engineering: Does the manager adjust the capital structure to maximize returns on the investment?
- Operation Improvement: This driver refers to any strategies the private equity firm uses to increase revenue.
These three drivers are often employed together but can also be separate. Which ones are used to create value depends on the type of investment. So, keep this in mind as you’re researching the private equity firm.
Your Investment Team
You may have an investment manager always ready to answer your questions. You trust the manager to handle your private equity investment, but what about their team? Most private equity managers are supported by a team and it’s a good idea to know a little bit about their background.
What’s the team experience? Do they work seamlessly together or are there arguments about investment strategies? The more you know about your investment team, the easier it is to trust the private equity firm with your money. This can also help ensure you’re partnering with the right private equity firm to reach your financial goals.
The Private Equity Firm’s Unrealized Portfolio
As you’re reviewing the private equity firm’s track record, you’re probably going to run across unrealized investments. This can be common and it’s not necessarily a sign the firm isn’t realizing its investments.
Sometimes private equity firms start raising capital for new investments before previous ones are fully realized. When this happens, the money manager’s track record can seem to take a hit.
However, you shouldn’t focus solely on metrics created by unrealized portfolios. Instead, see if the unrealized investment is on track or if it’s failing.
What is the Firm’s Investment Process
A private equity firm can have a great strategy. The strategy all but guarantees you see a significant return on your investment. However, the strategy is only effective if the team can successfully execute the plan, and this means learning more about the firm’s investment process.
How do they handle deal-sourcing? Do they have in-house experts or rely on third-party partners? What about tools? Is the private equity firm taking advantage of investment tools like software AI (artificial intelligence), and data analytics?
If an issue occurs, what is the investment team’s strategy to minimize any potential damage? The answers to these questions can help you determine if this is the right private equity firm to help grow your investment portfolio.
Choosing a Private Equity Firm Doesn’t Need To Be Complicated
With a little research and the right drive, you can find the right Houston-based private equity firm to help you realize your financial goals. Remember to do your research carefully, not all firms and money managers are equal.
Take the time to look at their investment strategies and check how they create value. Don’t be afraid to ask questions, after all it’s your money you’re considering investing.
