There are roughly five types of investment categories that can be distinguished within private equity.
"}},{"componentType":"accordion","accordionList":[{"title":"1. Venture Capital","richBody":{"value":"Venture capital focuses on investments in startups companies that are in the early stages of their lifecycle and have high growth potential. The investor typically plays an active role in the strategic development of the company. Venture capital involves high risks, but these may be offset by the potential for higher returns.
"}},{"title":"2. Growth-equity","richBody":{"value":"Growth-equity-funds provide capital to medium-sized companies that are already (or nearly) profitable and want to use the funding to expand their existing operations. This capital might be used for acquisitions or entering new markets. Investors benefit from the company’s continued growth without needing to take a large ownership stake.
"}},{"title":"3. Buyouts","richBody":{"value":"Another form of private equity is buyout funds, which invest in established companies with the aim of improving operational efficiency and increasing profitability. This type of investment is significantly less risky than venture capital but typically requires larger amounts of capital. In return, investors often receive a majority stake in the company.
"}},{"title":"4. Distressed Investing","richBody":{"value":"A less common form of private equity is distressed investing, which involves investing in companies that are in financial distress. The goal is to restructure these businesses and return them to profitability. If the investor succeeds in turning the company around, the returns can be substantial, but there is always a risk that the recovery plan will fail. A distressed manager needs specialized experience in corporate restructuring and must also possess legal expertise.
"}},{"title":"5. Secondaries","richBody":{"value":"Finally, there are secondaries, which allow investors to buy or sell existing interests in private equity funds. This can be attractive for investors who want earlier access to their capital or who prefer to invest in more mature funds. Secondaries offer investors comparatively more flexibility and help make private equity slightly less illiquid.
"}}]},{"componentType":"paragraph","richBody":{"value":""},"video":{"type":"video","originalUrl":"https://assets.ing.com/m/28c3d08d6f21fd91/original/ing_-private_equity-_short_3-1080p-1.mp4","videoPreviewURLs":["https://assets.ing.com/asset/b3df7719-d719-4f9a-859d-b0d492690c5a/1080p/ing_-private_equity-_short_3-1080p-1.mp4","https://assets.ing.com/asset/b3df7719-d719-4f9a-859d-b0d492690c5a/480p/ing_-private_equity-_short_3-1080p-1.mp4","https://assets.ing.com/asset/b3df7719-d719-4f9a-859d-b0d492690c5a/720p/ing_-private_equity-_short_3-1080p-1.mp4","https://assets.ing.com/asset/b3df7719-d719-4f9a-859d-b0d492690c5a/mp4/ing_-private_equity-_short_3-1080p-1.mp4"],"thumbnails":{"mini":"https://assets.ing.com/m/28c3d08d6f21fd91/mini-ing_-private_equity-_short_3-1080p-1.jpg","webimage":"https://assets.ing.com/m/28c3d08d6f21fd91/webimage-ing_-private_equity-_short_3-1080p-1.jpg","thul":"https://assets.ing.com/m/28c3d08d6f21fd91/thul-ing_-private_equity-_short_3-1080p-1.jpg"},"extension":["mp4"]}},{"componentType":"sectionTitle","title":"Private Equity Funds"},{"componentType":"paragraph","richBody":{"value":"Due to the substantial investments required, funds are established to raise capital primarily from institutional investors and high-net-worth individuals.
These funds are typically launched by large asset managers with specialized expertise in private market investing - think of names like BlackRock, Blackstone, Brookfield, and KKR. Thanks to their scale, they can reach a wide range of investors and build a well-diversified portfolio.
"}},{"componentType":"sectionTitle","title":"LP's en GP's"},{"componentType":"paragraph","richBody":{"value":"Private equity funds consist of two types of participants: Limited Partners (LP's) who provide the capital, and General Partners (GP's) who manage the funds, make investment decisions, and receive compensation for their services.
General partners invest using the capital supplied by limited partners. Through active management, they aim to help portfolio companies grow and increase in value. They may apply strategies to create value that are not always feasible in public markets, such as contributing their own expertise, merging business units, or optimizing the balance sheet.
Fund managers often have an informational advantage, whereas publicly listed companies must disclose all key information simultaneously to all stakeholders. Moreover, private equity typically involves a small group of knowledgeable and active shareholders with direct access to company leadership. This enhances strategic focus and alignment between management and shareholders.
Thanks to the long investment horizon, companies can benefit from sustained shareholder support. This strong shareholder base increases the likelihood of business continuity. Additionally, specific terms can be agreed upon that favor shareholders, while fund managers can intervene operationally when needed.
"}},{"componentType":"sectionTitle","title":"Investing in Two Phases"},{"componentType":"paragraph","richBody":{"value":"Investor capital is deployed in two stages. An initial amount is used during the fund’s setup phase to cover entry and ongoing costs, including management fees. Only once the fund manager identifies attractive companies to invest in will the remaining committed capital be “called” for investment. This is known as a capital call.
It may take time before the fund is fully invested in suitable companies, while investors often already pay management fees on the entire committed amount. This can be frustrating, especially since the capital cannot be invested elsewhere during this period. It can take one to two years before a suitable company is found.
To address this issue, semi-liquid evergreen funds have been introduced and are gaining traction. These funds allow investors to enter or exit on a monthly or quarterly basis. They are valued monthly and offer the option to buy or sell at the prevailing net asset value.
"},"alignedImage":{"transformBaseUrl":"https://assets.ing.com/transform/d52bf0e6-b91f-4c9e-8718-d1bd523bca7e/PORTRAIT-OF-YOUNG-MAN-WITH-ARMS-OUTSTRETCHED-AGAINST-SKY","altTextNL":"\"\"","original":"https://assets.ing.com/m/16cd93b7f67f2d27/original/PORTRAIT-OF-YOUNG-MAN-WITH-ARMS-OUTSTRETCHED-AGAINST-SKY.jpg","extension":"jpg"}},{"componentType":"accordion","accordionList":[{"title":"Costs","richBody":{"value":"Investors should be aware that costs are generally higher than those associated with many other types of investment funds. While management fees, typically ranging from 1% to 2.5%, are not drastically different from those of actively managed equity funds, it is primarily the performance fees that make private equity relatively expensive. These performance fees can reach up to 20% of the profits, provided that returns exceed a predetermined threshold, known as the hurdle rate. This hurdle is usually set between 7% and 8%. If returns surpass this level, performance fees can significantly impact overall returns. On the other hand, managing a private equity fund requires considerable time, attention, and specialized expertise. This explains why such funds tend to charge higher fees than the average equity or bond fund.
"}},{"title":"Returns","richBody":{"value":"That said, private equity funds have historically delivered attractive returns. According to data from the U.S. Private Equity Index by Cambridge Associates, the average annual net return (i.e., after fees) over the past twenty years has been nearly 15%. In comparison, the U.S. benchmark index S&P 500 returned just under 6% per year over the same period.
It’s important to note, however, that returns from private equity are difficult to predict. A fund’s success depends on the performance of its underlying companies, which are not always transparent to investors. Unlike publicly listed companies, private firms often do not publish detailed annual reports. Moreover, the performance gap between top and bottom managers in private equity is significantly wider than among fund managers in public markets.
"}},{"title":"Investment Horizon","richBody":{"value":"In a traditional private equity fund, investor capital is locked in for a long period. The average capital commitment typically ranges from five to seven years. This makes private market investments illiquid, unlike investments in publicly traded companies. It is not possible to withdraw funds during the investment period. An exception to this are the previously mentioned semi-liquid evergreen funds, which allow investors to enter or exit on a monthly or quarterly basis. However, even with these structures, investors should still maintain a long-term perspective.
The inability to withdraw funds early in a traditional private equity fund is an obvious drawback, as the capital remains unavailable for years. However, there are also advantages. It prevents investors from making emotional decisions, such as pulling out during market turbulence, which can lead to significant losses. In this way, private market investing can offer a sense of calm: there are no daily price fluctuations. Additionally, investors expect higher returns in exchange for the illiquid nature of private equity, known as the illiquidity premium.
"}},{"title":"Exit","richBody":{"value":"Eventually, a suitable exit moment can be chosen to realize returns on the investment. When that moment will occur is not known in advance and depends on factors such as market conditions. Data from PitchBook (a data provider) shows that a holding in a fund’s portfolio is kept for an average of just under six years before a decision is made to liquidate it. An exit can take various forms. A company may go public through an IPO, or a stake may be sold to other private equity managers or strategic buyers.
In principle, all (remaining) positions are sold when the fund reaches the end of its life, typically after ten to twelve years. Most funds allow for an extension of a few years if a majority of investors agree. In contrast, semi-liquid evergreen funds have no fixed end date. Holdings are maintained until an attractive selling opportunity arises, and proceeds from sold positions are reinvested by the fund manager.
"}},{"title":"Risks","richBody":{"value":"Investing in complex investment funds involves additional risks compared to non-complex funds. Instruments that provide access to private markets are typically illiquid or only partially liquid, and in most cases, carry a risk profile similar to that of a portfolio composed entirely of equities. Illiquidity means that investments cannot be sold, or can only be sold with difficulty or under limited conditions. This means that when you want to sell your investment, it may not be possible. A sufficiently long investment horizon is therefore essential for illiquid investments. As with equity and bond funds, your return depends on the fund manager and the performance of the underlying investments. Private market investments are speculative and complex instruments. Additional risks include: higher levels of leverage (financing), limited transferability of investments, reduced investor protection, less transparent valuation, less information available to investors compared to public market investments.
"}}]},{"componentType":"sectionTitle","title":"Conclusion"},{"componentType":"paragraph","richBody":{"value":"Investing in private markets offers investors the opportunity to diversify their portfolios and benefit from exclusive opportunities with potentially higher returns compared to traditional investments over the long term. Although capital is tied up for an extended period and is not, or only partially, liquid, this can help prevent emotional decision-making. In conclusion, private equity can be a valuable addition to a portfolio of publicly traded investments. At the same time, it is important to recognize that investing in complex investment funds carries additional risks.
"}},{"componentType":"sectionTitle","title":"Disclaimer"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. You may lose all, or part of your investment. Learn more about the risks of investing and how to limit them. Also, read the General Terms and Conditions for Investments. Curious how ING takes sustainability into account when making investment decisions? For more information about the ING Sustainable Investing policy, visit ing.nl/ESG.
"}},{"componentType":"paragraph","richBody":{"value":""},"textLinks":[{"url":"/en/private-banking/investing/private-markets-infrastructure","text":"Discover the world of Private Markets - Infrastructure"}]}]},"complementaryZone":{"flexComponents":[{"componentType":"cards","cards":[{"componentType":"productCard","cardType":"product","cardSize":"small","title":"Make an appointment","intro":"Let's start a conversation.","image":{"transformBaseUrl":"https://assets.ing.com/transform/3e538078-976f-4b74-b49c-90d7cd895df2/Web-12","type":"image","width":307,"original":"https://assets.ing.com/m/1d41bac33a10b194/original/Web-12.svg","extension":"svg"},"link":{"url":"/en/private-banking/customer-service"}},{"componentType":"productCard","cardType":"product","cardSize":"small","title":"Log in to My ING","intro":"Quick insights into your financial situation","image":{"transformBaseUrl":"https://assets.ing.com/transform/33c4e3a2-7e3d-47a1-9c6f-1993eedcdb8c/Web-13","type":"image","width":307,"original":"https://assets.ing.com/m/5aecfb619a645cd6/original/Web-13.svg","extension":"svg"},"link":{"url":"https://mijn.ing.nl/login"}}]}]}}}