Institutional Investors and Funds
Investing private capital in alternative investments in the capital markets refers primarily to capital investment in companies. It also defines alternative investments and, in our scenario, investments in real estate, such as direct investment in companies, real estate worldwide, infrastructure projects, other funds, etc. Non-traded investment funds (shares not traded on the stock exchange) are legally incorporated as a limited partnership and managed by the general partner (GP) which may be a private individual or a company.
Investment Structure
Private equity funds are structured in such a way that the investors are the partners who finance the investment and have limited liability (limited partner). The investment manager also invests in the fund and is a general partner, bearing responsibility and making decisions based on his knowledge, experience and on-the-ground presence. This allows him to manage the investment in keeping with the business plan. With the aid of his knowledge and capabilities, the investment manager successfully navigates changes in the market or handles situations where previously established certainties deviate from the basic assumptions of the business plan.
Expertise and Business Skills
Unlike hedge funds or mutual funds which generally invest in trading securities, and where the price fluctuates depending on market supply and demand, private equity funds invest in non marketable securities whose price is set by negotiation in advance. As a result, this model of investment has real impact and additional advantages as well:
the ability to negotiate a lower price when the transaction is agreed upon, i.e. an “advantageous price”;
active participation on the portfolio’s board of directors, enabling control over decision making; and
experience and added management value which improve the performance of the portfolio companies.
Investment Portfolio Allocation
The investor’s return is based on tangible financial or actual business events, such as dividend distribution, an exit by one of the portfolio’s companies compared to the return in the regular capital markets, where non-tangible events can influence the investment’s profitability without any actual financial basis. As a result, the non-negotiable nature of these funds can help to lower the overall risk in the investment portfolio by reducing the influence of capital market events to a minimum.
Interested in participating in an investment as an institutional investor?
Questions & Answers
Generally, the win-win remuneration model for the professional manager is structured to provide remuneration only after the limited partners have received their original capital investment back with the preferential annual percentage returns initially agreed upon. Only following this is the professional manager recompensed with the win-win success fee.
Private equity funds are focused more on raising the value of the investment and less on the current cash flow in order to produce a significant capital profit. Furthermore, with cash flow-producing investments that provide dividends, such as multifamily property investments, the investor also receives regular payments (usually on a quarterly basis). Typically, a representative graph of the cash flow in this type of investment would show a J-curve, describing a sharp drop followed by a steep upward swing, similar to the shape of a letter J.
The capital investment is usually invested at the start in the actual asset (“capital expenditure”). The business plan is then executed and the property renovated and improved. Following this, there is a slight increase due to ongoing dividend distribution, ending in a steep, rapid increase at the end of the fund’s life cycle
upon receipt of the capital repayment. The J curve differs between investments, depending on the investment method, number of assets, duration of the investment and its investment strategy.
Private equity investments are suitable for high net-worth individuals and/or qualified investors, companies and institutions. The capital necessary for this type of investment is relatively high, and the lack of ongoing access to these liquid assets after making the investment is a factor for a certain period, but one then may expect to be compensated for this in the long term with a liquidity premium. This period during which there is a lack of liquidity permits the professional manager to leverage the capital to maximize the efficiency and profitability of the business plan. This type of investment must be made with available funds to which the investor does not need access for the period of the investment.
