13 Jun 2019

Private Equity v.s. Equity Crowdfunding: Which investment is more suitable for you?

Private Equity Investment

What is private equity?

Private equity is a source of alternative investment. They are shares representing ownership in an entity and are not traded publicly on the stock exchange market. Private equity often gets its investment capital from high net worth individuals and firms that buy private companies’ shares.

How does private equity work?

Private equity investment is generally done through a private equity fund (PE Fund). The PE Fund is obtained by combining the investment capital from high net worth individuals or institutional investors. These funds will then be invested in the representation of the investors.

Frequently, the funds will go into new companies that have notable growth prospects in industries like biotechnology, healthcare, and software. Private equity firms invest in these new companies and add value to them to make them more profitable. This can be done by sending in management teams to reorganize and boost the company’s productivity. They also encourage growth by aggressively cutting costs or jobs.

Pros of Private Equity

Private equity is an alternative investment that has a role to play in an investment portfolio, as it helps to diversify risk and boosting returns. For a long period of 10 years and more, private equity has outshined traditional public equity markets. Private equity usually generates a higher return when the companies are eventually sold or listed in the public markets through an IPO.

Cons of private equity

With the potential of great returns, it is also much riskier compared to public equities. The minimum capital that an investor has to put in can be exorbitant.  Some funds may require $250,000 minimum investment capital and some may need millions of dollars. This makes private equity inacessible to the masses.

Other than private equity, we can look at equity crowdfunding which is more suitable for people to start investing.

Equity Crowdfunding Investment

What is equity crowd funding?

There are 4 common types of crowdfunding such as donation crowdfunding, reward crowdfunding, debt crowdfunding, and equity crowdfunding. Today, we will be talking about Equity Crowdfunding.

Usually, equity crowdfunding is done by startups to raise capital.

Equity crowdfunding investment refers to investors providing capital in return for a stake in the company. The profit comes from dividends and capital when the share value rises.

Why should you consider Equity Crowdfunding invesment?

  1. Equity crowdfunding investment usually has higher rewards than public stocks. They usually offer returns of 12% to 25% a year. However, the higher returns will also mean greater risk involved.
  2. Equity crowdfunding also helps to diversify your investment portfolio. This diversification allows investors to spread their risk across many SMEs, making the process less risky.
  3. There is no high capital required for crowdfunding, investors can contribute to as lows as RM 3,000.
  4. Equity crowdfunding gives investors an opportunity to invest in higher risk and rewards investments, which was previously available to institutional investors only.
  5. You may get additional benefits like discounts and vouchers as part of the companies’ offer.
  6. You get to help small businesses that you are passionate about. Funding startups and small businesses mean that you are helping other people to reach their goals.

For financial advisors who are interested in learning how the rich invests be sure to join us in our future High Net Worth Events!

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