Private Equity

This chapter explores the risks inherent in investing in private equity and how best to manage them. Private equity is, most broadly, ownership in nonpublic companies, and includes not only financing to start up a business, but also financing required for subsequent growth stages during its life cycle. Three types of investment in private equity are venture capital, growth capital, and special situations. Private equity may not suit every investor. The main features of private equity include long investment horizons, unreliable valuations, lack of transparency, and high fees. Risks faced by private equity investors are explored and categorized into market‐related and investment‐specific risks. Managing these risks covers good manager research and selection, diversification, access to good funds, and due diligence. The setting of appropriate risk and return expectations is discussed, as well as evidence to support these expectations. If an investor does not have access to resources to achieve good implementation, a fund of funds provider may be a suitable alternative.