When high net worth individuals or firms invest in the companies which are privately held or not listed on any stock exchange, is called Private Equity. On the other hand, Hedge fund implies a type of mutual fund that pools money of various high net worth individuals or firms into a variety of financial instruments, to generate good returns, with the help of different strategies and techniques.
Both private equity and hedge fund are the forms of an investment fund that approach accredited investors, set up as LLP (Limited Liability Partnership) or LLC (Limited Liability Company). The article excerpt presents you all the important differences between a hedge fund and private equity.
Content: Private Equity Vs Hedge Fund
|Basis for Comparison
|Private equity refers to the equity capital indicating the ownership interest of the Private Equity firms in an enterprise which is privately held.
|Hedge fund refers to the investment avenue that pools funds of investors, to invest in various financial products using various risk management techniques.
|To acquire small and sick companies, to better its performance and then sell it off at higher price.
|To provide maximum returns in less amount of time.
|Long term profit potential
|Short term profit potential
|Investment is made directly in companies
|Investment is made in highly liquid assets
Definition of Private Equity
In simple terms, private equity means raising equity privately. When the investment is made by high net-worth individuals, institutional investors, university endowments, pension funds, banks and insurance companies etc. in a company which is not publicly held, or one which is underperforming by employing leveraged buyout, it is called as private equity.
It is an unregistered investment avenue, wherein various investors pool their money with an aim of owning substantial interest and control in the firm. Its objective is to improve its performance and increase its worth by making changes in management, modernising operations, etc, so as to sell it later at a price higher than what initially invested. The investors usually undertake to invest a specific sum with the fund throughout its life.
It includes both venture capital and growth capital. Venture capital is the capital invested by the venture capitalists in small private companies in their initial stages, whereas growth capital refers to the funds supplied to existing large companies for the purpose of expansion.
Definition of Hedge Fund
A private investment vehicle which is not open to the general public rather it is offered to selected clients only is called hedge fund. It pools the funds of the wealthy investors, to invest it into a range of securities, with the help of a range of investment techniques to generate good returns against the specified level of risk.
The hedge fund is professionally managed by an investment management firm. They are lightly regulated funds, that faces fewer regulations in comparison to publicly traded mutual funds that permits them to hold strategic short positions to maintain capital at the time of market downturn.
Hedge funds are extensively planned and controlled investment portfolio, that uses a range of modern investment strategies to generate good returns. The strategies may include leveraged, long, short positions in the national and international market.
Key Differences Between Private Equity and Hedge Fund
The points give below discuss the difference between private equity and hedge fund:
- Private equity can be understood as the investment funds brought in by the privately held company from high net worth individuals or firms, large institutional investors, etc. In contrast, hedge funds connote a collective investment vehicle, usually open to high net worth individuals or firms to invest in a variety of securities, using investment strategies.
- The primary object of the private equity is to acquire small and financially distressed companies, to improve its performance by employing different strategies and thereafter selling it either privately or through IPO, at a profit. As against, the fundamental objective of a hedge fund is to generate maximum returns is less amount of time.
- As both private equity and hedge fund negate high-risk investment for a safer investment. The level of risk is high in a hedge fund as compared to private equity as hedge funds tend to earn maximum possible returns in very less time
- In case of private equity the funds are reinvested in equity and debt of the private companies, so the funds are locked in for a period of minimum period of 3 to 5 years. On the contrary, hedge funds are invested in liquid assets, for a short period.
- In private equity, the investment is made in the company directly, by purchasing the private company. Conversely, in hedge funds, the investment is made in highly liquid assets, that are readily convertible into cash, such as stocks, bonds, currencies, arbitrage, etc.
By and large, private equity investment is oriented towards long-term investments in illiquid assets, of the target entity. Conversely, hedge funds are concentrated towards short-term liquid assets, that are readily convertible into cash and do not give direct control over the business.