Invest in Private Equity: Getting Started

What’s in this section:

 

 

How can I get access to Private Equity?

For the first time, InvestX Financial allows retail investors to access brand-name, top-quality private equity deals, investing with the same terms as institutional investors. We do this by aggregating InvestX Financial members’ smaller checks and writing the required multi-million dollar checks.

Do I have to be a certain type of investor?

For most deals, you must be accredited to invest directly in a private equity deal.

You don’t need to be accredited to invest in private equity through a fund (which comes with the added benefit of greater diversification.)

 

What is the definition of an accredited investor?

It is an investor that meets one of the following criteria:

  • An individual who, alone or together with a spouse, owns financial assets worth more than $1 million before taxes but net of related liabilities

  • An individual, who alone or together with a spouse, has net assets of at least $5,000,000.

  • An individual whose net income before taxes exceeded $200,000 in both of the last two years and who expects to maintain at least the same level of income this year;

  • An individual whose net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and who expects to maintain at least the same level of income this year

  • An individual who currently is, or once was, a registrant with a registered adviser or dealer, other than a limited market dealer

 

Here are some other examples of accredited investors:

  • Financial institutions
  • Governments and governmental agencies
  • Insurance companies
  • Pension funds
  • Registered charities
  • Certain mutual funds, pooled funds and managed accounts
  • Companies with net assets of at least $5 million
  • Persons or companies recognized by the OSC as an accredited investor

 

How do I evaluate a deal?

Members are always assured that a professional PE firm has done the due diligence and is investing alongside. A PE firm hires hundreds of experts (economists, accountants, lawyers, business analysts, financial analysts, etc.) to evaluate each investment before they commit capital. This process often takes months and months of work.

Of course, InvestX Financial undertakes its own due diligence, and we encourage you to perform your own due diligence and to help you do so, we provide detailed and thorough information on each deal. This may include a video from the CEO with a Q&A, company financials, information on the company’s management team, their business plan, etc.

No risk, no reward, right?

 

Are there risks associated with PE investing?

In a private equity investment, investors must rely on the PE firm’s reputation and information provided by the PE firm.

However, InvestX Financial greatly reduces the risk associated with PE investing in a number of key ways:

InvestX Financial provides access to accurate, and detailed deal information

Qualified members gain exclusive access to confidential, high quality, and accurate information on each private equity deal.

Each investment is Professionally and Thoroughly Vetted

InvestX Financial members are always assured that a professional PE firm has done the proper due diligence. The PE firm often hires hundreds of experts (economists, accountants, lawyers, business analysts, financial analysts, etc.) to evaluate each investment before they commit capital. The due diligence process is extremely thorough and usually takes about 3 to 6 months.

 

Issuer and Members’ Interests are Always Aligned

 

No listing fee is taken from the private equity firm offering the investment. This means we only make money when members make money. Interests are always aligned with members' interests, keeping the focus on only sourcing and offering the best investment opportunities.

Most deals are co-invested by the Private Equity Firm

Members and the PE firm’s interests are aligned. This is because it is mandatory that the PE firm co-invest alongside members, with the same terms.

 

What’s the minimum investment?

 

Minimum investment amounts vary, depends on the deal but usually fall between $2,500 and $5,000.

What return can I expect?

 

The goal of a private equity investment is to provide positive, double-digit returns, regardless of the market conditions.

According to Cambridge Research, PE has had annual returns of 16% over the past 10 years, which is greater than the S&P, TSX, and T-Bills combined.

How much does the private equity firm make?

When a private equity firm sells the company or exits the investment, the limited partners usually receive a guaranteed rate of return, plus 80% of the profits thereafter.

The private equity firm receives the remaining 20% of the profits. This is called "carried interest" or "carry." It is also known as a "performance fee" because it is the fee that the manager makes for enhancing the company's performance and making the investors such a big return.

It’s important to note that the manager only receives the performance fee once they have returned all of the contributed capital to the investors (limited partners).

PE fund managers also receive a small management fee, which is around 1-2%. This fee is for covering the cost of managing and investing in the private company.

 

How do I get my money back?

 

Private equity investments are meant to be longer-term investments and the investor is rewarded with a substantial return for their patience.

There is no set length of time for every private equity investment. Each investment has it’s own "lock up," or term, which is the length of the investment, but it is usually between 3-10 years. Some investments do pay a quarterly dividend or "coupon" (usually a semi-annual dividend).

 

What documents do I need to sign?

 

An investor must complete and sign a confidentiality agreement and subscription documents.

 

How am I protected?

 

As an investor in a Private Equity limited partnership (called the limited partner) you are afforded certain protections through the limited partnership agreement and the subscription agreement.