Private equity funds are funds made available to a limited group of high net worth investors, making them similar to hedge funds. Private equity funds are similar to hedge funds in that both require a sufficient initial investment, usually around $1 million. However, while there are some similarities, hedge funds do vary from private equity funds.
Hedge funds usually aim to produce returns in a relatively short amount of time, while private equity funds have a much longer hold period, since they have a prolonged interest in the companies in which they are investing. This is why it is much harder for investors in private equity funds to withdraw their money; it is usually tied up for quite some time. In some cases, investments can be held for 10-12 years. Generally, hedge funds also aim to produce higher returns than private equity funds. In regards to risk, the private equity fund is analyzed to include both short-term and long-term risk assessment and they are able to adjust their tolerance for risk as market conditions vary. Volatility is usually seen as an advantage to hedge funds, since it is an opportunity to garner higher returns, whereas private equity funds tend to be a bit more conservative.
Private equity funds are also very interested in the strategic plan of the company and will engage in research, evaluate results, and have an active participation on the board of directors. They even aim to replace the senior management in some instances. Their due diligence process is therefore generally much more entailed than the due diligence that a hedge fund manager may employ.
Many times, private equity funds invest in businesses with the intention of obtaining a controlling interest in hopes of later restructuring that company. The restructuring may come through leveraged buyouts,
Some big players in the private equity fund world include the Carlyle Group, who manages roughly $33 billion in assets, and the Blackstone Group, who’s assets total over $28 billion.