A guide to private equity investments

Claire Smith, our Alternatives Director, walks financial advisers through the basics of private equity investments in a simple guide that can help you explain the key concepts of private equity to your clients.



Claire Smith
Head of Private Assets Sales, ANZ

What is private equity?

Private equity, quite simply, is where ownership in a company is transacted privately rather than through a stock exchange. This ownership structure takes the focus off the quarterly earnings cycles and short-term valuation drivers that tend to preoccupy listed companies, enabling management to focus on sustainably growing the business over the long term.

How private equity creates value

Private equity investment opens accessibility to diverse companies. It can fuel companies in their early start-up and growth phases as well as changing the fortunes of underperforming companies through buyouts and turnarounds.

This access to growth and transformation transactions across the company lifecycle can boost private equity performance compared to listed market companies. Public markets typically cater specifically for larger company sizes which can afford to deal with the complications of listing on a stock exchange.

Private equity investment strategies

Private equity investment is typically structured around a company’s capital requirements during its lifecycle using one of the four strategies below:

Venture strategies

This focus is on providing funding to start-up or early-stage companies. These are companies at the beginning of their journey, and the funding provided helps them commercialise their products and services

Growth strategies

This focus is on investment in companies that are more advanced in the commercialisation of their products and services, but that still require high levels of investment to achieve their full potential.

Buyout strategies

This involves implementing a change in the ownership of an established company, usually to facilitate a change in management, a new strategic direction, a change in capital structure or to drive improved operational performance.

Turnaround strategies

This usually involves investing in companies that have run into operating difficulties, and typically aims to implement significant changes to management and the company’s corporate structure to help the operation become profitable.

Types of private equity investment

To access the private equity market, opportunities exist in primary investments, secondary investments and co-investments. Here’s an overview of each investment category:

Primary investment

Primary investments are made directly in newly formed private equity funds building a portfolio of companies.

For example, an investor can commit $1 million to a fund manager to find 10 companies to invest in. The fund manager will allocate the money as they find companies to invest in, eventually building a portfolio of 10 companies. There will be a period of time to grow and harvest them before exiting the investments, which is when the investor gets their return.

Risk is involved as the investor won’t know which companies are being bought and will need to trust the fund manager to make the right investment decisions to grow their capital. But there’s potential to generate good returns from a diversified portfolio since the investor is not just buying one company and putting all their eggs in one basket.

Secondary investment

Secondary fund investments involve buying and selling pre-existing investor commitments to private equity funds.

For example, if you are an investor with a fund holding that you’ve had for three years, but you now need your money back, you can only liquidate it by selling it to another counterparty using a placement agent. Typically, investors will have to sell at a discount to the valuation, because the buyer will also want to generate a decent return.

This approach has become popular because investors can reduce their holding periods. Rather than investing in a 10-year fund, they can buy into it part of the way through and still extract some value. In theory, the secondary market can be profitable as investors have a shorter holding period and usually buy at a discount.


This is where participants invest directly or co-invest in selected companies alongside other investors, including the fund.

For example, when a fund manager decides it’s worth investing additional capital into a company within the selected portfolio (on top of the 10% already allocated from the capital of the fund, as per the example above), co-investments can be used to give the investor extra exposure to that company.

The participant investor becomes a group shareholder, with the fund as the majority investor and the participant as a partial investor alongside the fund. It can be a good way to invest as the participant can analyse the company before deciding how much they’d like to invest. This is different to the primary approach where the investor gives the fund manager the money to allocate as they choose, with no input from elsewhere.

Interested in learning more about private equity?

Schroders is committed to helping you and your clients learn more about private equity. View our range of articles or visit the Schroder Specialist Private Equity Fund page.


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Claire Smith
Head of Private Assets Sales, ANZ


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Claire Smith
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