What Is Private Equity?

Published On: June 15, 2023Categories: Insights

Private equity explained

If the continual swings of the public stock market make you anxious or you’re looking for a way to diversify your portfolio, private equity, especially private real estate, could be the solution. Until recently, this asset class was only available to the ultra-wealthy and institutional investors. Now, through private equity firms like Equiton, all Canadians can access the growth potential of private real estate investing. 

What is private equity?

Private equity is a key type of alternative investment that isn’t publicly traded and is therefore insulated from stock market fluctuations. Types of private equity include: 

  • Venture capital
  • Real estate
  • Leveraged buyouts
  • Distressed funding
  • Growth equity
  • Hedge funds 

In the past, it was a way for newer businesses to raise capital until they could be listed on a public stock exchange. Though recently, the space has grown considerably as more and more companies choose to stay in the private sector. 

How does it work?

Investors commit money to a private equity firm that uses the capital they raise to finance a non-public company. Investors then benefit as the underlying company grows. Unlike public companies where shares/stocks can be sold at a moment’s notice, these investments generally have longer terms with set timeframes (often years) 

What are the benefits?

Like most alternative investments, private equity can provide vital diversification within an investment portfolio since alternatives have a different risk and return profile than traditional investments. Some of the benefits of private equity are: 

Longer terms:

Including private investments within a portfolio can often boost risk-adjusted returns over the long term. This extended investment horizon allows private equity firms to focus on long-term value creation rather than being driven by short-term market fluctuations. It gives the firms more time to implement strategic initiatives, improve operational efficiency, and grow the company’s value.

Potential for higher returns:

Private equity firms typically target companies with growth potential or that are in distress and can be turned around. Through active management and strategic initiatives, the aim is to enhance the value of the investments, leading to potentially higher returns for investors.

Operational expertise:

Private equity firms often have a team of industry experts and experienced professionals with extensive knowledge and operational expertise. They work to identify areas for improvement, implement best practices, and drive operational efficiencies. 

Portfolio diversification:

Private equity investments can offer a source of diversification for investors’ portfolios. Returns have historically exhibited low correlation with traditional asset classes, such as stocks and bonds, providing an opportunity to reduce overall portfolio risk. 

What to consider

While offering several benefits, it’s important to note that private equity can have a higher risk profile than other asset classes, your funds aren’t as liquid, and you must commit to a longer investment horizon. Unlike publicly traded companies, private companies are not required to produce the same level of earnings reports and performance reviews. Investors considering private equity should determine:

  • Their risk tolerance
  • Investment objectives
  • Consult with financial or investment professionals to determine if it aligns with their overall investment strategy

Private equity real estate

Private equity real estate deals in properties rather than companies while adhering to the same tenets and offering similar benefits. Canadian private real estate specifically has historically low volatility, can have higher risk-adjusted returns and is an attractive long-term holding due to its lack of correlation to traditional asset classes. Multi-residential real estate, in particular, can also provide a level of inflation protection through annual rent increases. Even during the last six major market meltdowns, Canadian private real estate demonstrated significant downside protection relative to other major equity-based asset classes. 

Real estate is a well-diversified sector with many segments including office, retail, industrial and multi-residential. There are opportunities in multiple stages of a property’s lifecycle from newly constructed properties to older value-add properties to development on vacant or underutilized land. Each type includes different risk and return profiles, together creating a balanced and sustainable portfolio.  

Equiton’s private real estate advantage

Equiton is a leading Canadian private real estate investment firm that manages various private real estate investment trusts (Private REITs) and developments within the private equity space. Though a private firm, Equiton strives to operate with the same financial transparency as its public counterparts, affording our investors peace of mind.  

Equiton’s private real estate investment solutions are expertly managed for long-term success and provide strong returns for investors. Equiton’s flagship Private REIT, the Apartment Fund, recently celebrated 85 consecutive months of consistently positive returns, proving the viability and profitability of this essential asset class. 

Contact us today to learn more and to grow your wealth with private equity.