How Private Equity Can Teach You To Resist Recessions | Smart Change: Personal Finance

(Caroline Hartley)

Private equity (PE) investments are not publicly traded. With money pooled from institutional and individual investors, groups buy private equity in companies they want to fix and reverse — and hopefully make a huge profit. Since this investment category became popular in the 1970s and 1980s, the long-term personal investment approach to investing has typically outperformed other sectors during the downturn, generating some of its best returns after the recession. Here’s how acting like a private equity can help you weather tough market spots.

How do private equity handle bad markets

Private equity firms stick to a long-term investment strategy, averaging around five years. They keep investing during turbulent times, and quickly do enough due diligence (will this company add value?) to work out the kind of short-term buying opportunities that economic bottoms create. By buying steadily when other investors are walking away, PE is getting promising assets at a deeper discount.

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Like private equity firms, individual investors can also pursue long-term strategic decisions. Sticking to a regular investment schedule and staying diversified, even in a volatile market, provides investors with an opportunity to buy into solid companies that may have simply been dragged into tempting values ​​alongside the rest of the market.

Additionally, private equity groups cannot cash out their investments quickly or easily. This prevents private equity firms from selling out of panic; They tend to stick with their investments through tough markets. Public market investors may benefit from the same patience and discipline.

What private equity can and (maybe) not do

Private equity funds know how to keep cash on hand in a variety of economic climates, giving them plenty of “dry powder” to use for dealing deals. If they need the money to seize a short-term opportunity, they don’t necessarily have to worry about borrowing when interest rates are higher. This strategy can be difficult for individual investors to imitate, and it requires planning (tracking income, expenses, and savings). But if you have low debt, and set aside a cash fund that you can tap into when you need it, you can follow PE to act quickly when opportunity knocks.

Private equity firms also have access to experienced and experienced people. Focused teams, value creation and sector professionals who work exclusively in a portfolio can analyze market cycles and find opportunities that may not be obvious to the average investor. Investors, this is where they pay to access knowledge; It is important to do your research and due diligence before jumping into investing.

Why private equity may not always win

Recently, the number of private equity investment opportunities has dwindled, and the values ​​at which private equity groups sell companies have declined, with further declines likely in the coming months. It remains to be seen if PE will once again overcome this downturn, and maintain its overall outperformance compared to the general markets.

In the meantime, try not to act on your fears during the economic downturn. Instead, take the same steps that have seen private equity during previous stock market storms: focus on the long-term, stick to the investments you believe in, and look for new opportunities when the market is trading at a discount.

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