An introduction to private equity investments

In today's financial landscape, the incorporation of alternative investments into portfolios is more pertinent than ever. The vast majority of U.S. firms remain privately held, outnumbering public companies significantly by 64x. In other words, for every publicly listed company in the US there are 64 private companies. This discrepancy highlights a vast reservoir of investment opportunities beyond traditional stock markets, ripe for exploration. These private firms, often less susceptible to market volatilities, present a fertile ground for investors seeking diversification and potentially higher returns.

Secondly, the evolving dynamics between stock and bond markets have underscored the critical need for alternatives. Recent trends have shown an increasing correlation between the returns of stocks and bonds, traditionally considered to diverge in performance during market shifts. This convergence suggests that the historical safety net provided by diversifying across these two asset classes may no longer be as effective as it once was.

Where a private company is in its life cycle helps determine the kind of equity investment strategy associated with it. While an influx of capital is certainly required at each stage, the organizational and managerial challenges are usually different. That being said, from an investment point of view, each stage shares a similar objective: how can we make a good company better and share in its success.

Stage 1: Venture capital

A company in its infancy may have identified an addressable market, but it might not be generating much in the way of revenues or profits as the business model hasn’t fully scaled. These companies are looking for capital resources to help them get up and running. This stage typically offers the greatest reward for investors, but also entails the most risk.

Stage 2: Growth equity

In the growth equity stage, a company is now more mature and needs capital to keep expanding. A company like this will have top-line revenue and some income, but access to additional funding could help commercialize and professionalize it further.

Stage 3: Buyout

This final stage is all about possessing controlling investments in a mature company. Managers may be looking to restructure a company's finances or its operations — or a combination of the two — to help maximize returns for investors. The largest portion of the private equity investing universe in today's marketplace is in this stage.

Each stage in a private company’s lifecycle is replete with opportunities, but the investment amounts required at each stage are not small. This is one of the reasons why these investments have typically been available to only banks and large institutional investors.

However, over the last 10 years or so, this availability question has begun to wane as private equity funds are now being launched in an evergreen format. Individual investors are now able to invest in a growing number of private equity investment solutions Opens in a new window..

CIBC Asset Management is committed to providing market and investment insights and research. We want to help you find the right solutions to guide your investment journey. If you have questions about private equity investments and the role they might play in your portfolio, get in touch with your advisor or CIBC representative anytime.