What is private equity? Most of you know already, but just didn’t know the name for it. Private equity is ownership in “private” companies vs. public companies. You can buy public companies online using @robinhoodapp, or any other company I invested in (shameless plug) but you can’t buy shares in private companies that easily. You have to buy them directly from the business owner or other people who own the shares. Also most of these opportunities are for “accredited investors”; typically people who earn over $200K/year or have a net worth greater than $1M.
Why is this important to know? Let’s compare it to the NBA. Think about the risk vs. financial gains a family experiences when their kid goes from AAU to the Bulls, or from college to the Bulls, or from first contract to max contract. Think of public companies as max contract players and private companies as high school, college or first contract players. It’s riskier for sure, but the returns can be much greater. For example bonds are the safest investments, they average 1-2% annual returns. Public stocks are less safe, they average 8-10% annual returns the last 100 years. Private equity Funds are riskier, they average 15-20% returns.
Real life example: I just spoke to a MLB player (@t_beckham1 ) about getting into the trucking industry. He has three choices as an investor:
1) Safest: Buy XPO stock and get $4 earnings per share on average. They are one of the largest public trucking companies.
2) Riskiest: Start a new trucking business. He puts up the capital and buys trucks and find drivers and workers. Could make a lot of money, but it’s still super risky. This is a startup.
3) Private equity option: Buy a trucking business doing $3.5m in revenue and $500k/year in profit for $1.5m. Finance it like you would a house by putting down 25-35%, and getting a SBA Loan for the rest. The business already has customers, employees, trucks, revenue and profit. You own 100% returns could be 30-50% annually after debt is paid off.