Saturday, August 23: Where Does The Money Go?

The second quarter report from the Private Equity Growth Capital Council (PEGCC) shows that fundraising in private equity nearly doubled to $50 billion last quarter. This growth signals the continuing desire of sophisticated investors to exit the stock market.

Private equity funds can be invested in a variety of ways, including expansion of emerging companies, restructuring, or developing new products for existing businesses. One thing all of these investments have in common, however, is a lack of exposure to publicly-traded exchanges.

Young, start-up companies have little revenue, limited earnings and therefore have unestablished credit. It can be difficult to obtain loans under these conditions, so these organizations are left to rely upon friends, family, or outside, private investors. This is just one example of a private equity investment. Others include buyout deals, different forms of capital investments, and ‘loan-to-own’ strategies with companies in distress.

Generally speaking, this category is used to describe investments of capital into long-term strategies. These are intended as ‘buy-and-hold’ investments and by definition do not lend themselves to any degree of liquidity. This factor alone makes private equity quite risky for the individual investor. University endowment funds and insurance companies are a few examples of typical classes of investors in private equity.

Exit volumes from private equity slowed from the first quarter. A chart of the last 10 years showed that exit volumes tend to increase along with the quality of stock market performance. The four quarters with the lowest exit volumes in the last 10 years all occurred during the last financial crisis.

Regardless, the influx of funds during the second quarter suggests that many high-worth investors believe the market’s momentum has slowed, and prefer to move their funds into a more privatized sector where they feel they have greater control—and most importantly, a better chance of seeing their money grow in the future.