Hedge Fund vs Private Equity: 5 Key Differences

In this article, we will take a look at the comparison of Hedge Fund vs Private Equity. Before we go into the comparison, let’s understand what Private Equity is. In this article, we will also further explore more aspects of Private Equity.

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What is Private Equity?

Private Equity is an investment fund that is considered an alternative investment class. The name ‘private’ suggests that these investments are not available on a ‘public’ platform such as the stock exchange. Private equity firms, generally, invest in companies that are not publicly listed (i.e. you cannot buy the shares of those companies on the stock market) and tries to make the target companies (in which they invest) more profitable or otherwise more valuable through better strategy and execution.

Private Equity is important in the world of finance and has been for quite some time now. The first Private Equity firm was founded in the early 1900s. However, it wasn’t until the late 1970s/early 1980s that Private Equity started to take off.

One of the reasons for this is that Private Equity firms started using a new investment strategy: leveraged buyouts. With this strategy, they would borrow money to buy a company, and then they would try to improve the company’s performance so that they could sell it later at a profit. This strategy proved to be very successful, and Private Equity firms started to make a lot of money.

In recent years, Private Equity has come under fire for some of its practices. For example, some people argue that Private Equity firms often take on too much risk and that this can lead to problems for the companies they invest in. Additionally, Private Equity firms have been criticized for being too secretive and not doing enough to help the companies they invest in.

Despite these criticisms, Private Equity remains a very important part of the financial world. And, as long as there is money to be made, Private Equity firms will continue to be around in the market.

Hedge Fund vs Private Equity

Private Equity is different from a hedge fund in a few ways

Private Equity typically invests in companies that are not publicly traded, hence Private Equity firms often invest in illiquid assets (it’s difficult to buy and sell equity of private companies, as compared to companies trading on the stock market). Hedge funds can invest in both public and private companies.
Private Equity firms require the funds to be locked in for a longer period (5 to 10 years), and Hedge Funds do not have any such requirements.
Private Equity firms often take a larger role in the companies they invest in, becoming more like a manager and a decision-maker (or influencers at least) than a passive investor. Hedge funds are typically more passive investors.
Private Equity firms have longer investment horizons since they want to make meaningful changes to the company, it takes a while before the results show. Due to having a longer-term horizon and more control in the decision-making process, investment risks seem more manageable for private equity firms. Hedge Funds are focused on long as well as short-term gains. As with all short-term investments, the risk is less manageable.
Private Equity firms allow limited windows of opportunity to invest in them. Hedge funds are easy to invest in and close positions, as often as you like.

BlackRock Private Equity

BlackRock is one of the world’s largest asset managers, with more than $10 trillion in assets under management. The firm has a long history of investing in private equity, dating back to its establishment in 1988.

Private equity is a core pillar of BlackRock’s alternatives platform. BlackRock’s Private Equity teams manage USD$41.9 billion in capital commitments across direct, primary, secondary, and co-investments.
Blackrock

Blackrock Private Equity Investment Strategies

Blackrock’s PE strategy offers investors exposure to private equity in 4 ways as shown below:

Direct Strategy
Primary strategy
Secondary strategy
Co-investment strategy

All four strategies share the strengths of a common platform and seek to deliver top quartile performance for the investors.

BlackRock has a strong track record in private equity, with over $27 billion in realized gains from its private equity investments between 1988 and 2017. The firm is a leading investor in private equity funds, having committed over $75 billion to such funds as of the end of 2017. BlackRock’s direct investment team is also active, making over 100 investments since 2007.

Key People at BlackRock Private Equity

Russell Steenberg | Managing Director and Global Head of BlackRock Private Equity Partners (PEP)

Russell Steenberg oversees investments across primary funds, co-investments, and secondaries.

Andre Bourbonnais | Managing Director and Global Head of BlackRock Long Term Private Capital (LTPC)

André Bourbonnais oversees direct Private Equity investments

How to Invest in Private Equity

If you’re looking for a higher potential return on your investment, private equity may be a good option for you. With private equity, you’re investing in companies that are not publicly traded. This means that the company is not as scrutinized as a publicly-traded company, and there is less information available to the public about its financials. As a result, private equity investments may be riskier than investing in publicly traded companies.

Before investing in private equity, it’s important to do your research. You’ll want to look at the company’s financials and assess the risk associated with the investment. You should also consult with a financial advisor to make sure you’re investing in a way that’s appropriate for your needs.

If you’re comfortable with the risks and are willing to do your research, private equity can be a great way to invest your money. By taking the time to understand the investment, you can maximize your potential return while minimizing your risk.

How Much Do I Need To Invest in Private Equity?

Primarily, only institutional and accredited investors invest in private equity, due to the risks involved and long lock-in periods for the money. So, understandably, you’d need a significant amount of money to invest in private equity. Most PE firms would want a minimum investment in excess of $200,000 as a threshold, making it virtually inaccessible to most common people.

However, you still have options to invest in private equity through Private Equity ETFs.

Private Equity ETF

There are multiple private equity ETFs available in the market that you can invest in. Here are 5 popular ones, listed below:

Invesco Global Listed Private Equity Portfolio (PSP)
ProShares Global Listed Private Equity ETF (PEX)
Exos SPAC Originated ETF (SPXZ)
iShares Listed Private Equity UCITS ETF (IPRV)
VanEck BDC Income ETF (BIZD)

Do Private Equity Firms Acquire Smaller Companies?

While we keep hearing news about private equity firms acquiring large companies, they often acquire small companies (relatively smaller, i.e. valued at $25 million or lower) as well.

Private Equity firms see the possibility of realizing benefits from acquiring and integrating smaller companies. They do rigorous research to understand the financial benefits, and synergies before making the bid to acquire a smaller company.

Software Private Equity Firms

Some of the popular private equity firms that invest in software and technology companies are the following:

Vista Equity Partners: They have more than $86 Billion in AUM, and two decades of investing in enterprise software.

Insight Venture Partners: They have more than $90 Billion in AUM, and 25 years of experience in operating and investing in software businesses.

Thoma Bravo: They have been investing and helping software and technology companies for more than 40+ years now.

Accel-KKR: They have been investing in software and technology companies for more than two decades now.

Some other software private equity firms are listed below:

TA Associates
Providence Equity Partners
Genstar Capital
Francisco Partners
Hg

Private Equity vs Venture Capital

Size of the Target Company: Private Equity firms target relatively mature and established companies. Venture Capital firms target startups that are promising and show great potential for growth in the future.

Investment Concentration: Private Equity firms make large investments in a concentrated portfolio of a handful of companies. Since they want to actively help manage and execute the strategies, they stay focussed on a smaller number of companies. Venture Capital firms spread their risks and invest relatively smaller amounts in a larger number of startups. Startups have a much higher risk of failure, so this diversification helps venture capital firms to manage their risks.

How to Get Into Private Equity

Getting into private equity requires a combination of educational background, professional experience, hard skills, and soft skills.

Education and Professional Experience:

Bachelor’s degree in finance or a related quantitative field, for entry-level roles.

Master’s degree in finance or a related quantitative field, with some professional work experience, for a mid-senior role.

Specialized courses focusing on finance and private equity.

Professional experience in a firm that helped you build transferable skills that will help you succeed in the private equity world.

Hard Skills

You must possess top-notch skills in quantitative areas such as financial modeling, financial analysis, leveraged buyouts modeling, and business valuations.

Soft Skills

Networking is probably the most important soft skill to be successful in the business world, more so in the world of private equity. Networking skills will not only help connect with potential hiring managers but will also help you afterwards when you have to connect with clients.

Attention to detail is another trait that can set you up for success in the PE world.

Private Equity Jobs

Even though all PE firms may have different hierarchies and different job titles, some of the jobs available at private equity firms are the following:

Private Equity Analyst
Associate
Senior Associate
Vice President
Director or Principal
Managing Director or Partner

Private Equity Salary

The salaries in private equity vary from firm to firm, and of course, depend on the seniority (hierarchy).

An entry-level role in a PE firm can expect a salary somewhere in the range of $60,000 – $100,000 annually, and a mid-level associate can easily make about $150,000 – $250,000 per year.

What Does a Private Equity Analyst Do?

Private Equity analysts are professionals who use their skills to conduct research, build financial models, and do valuations of companies. Basically, the private equity analysts research and crunch numbers and then share their interpretation with their managers and leaders in the firm.

Private Equity Analyst Salary

Glassdoor estimates an average salary of a private equity analyst in New York to be $98,435 per year.

What Does a Private Equity Associate Do?

Private equity associates help in all stages of the deal, right from identifying potential investors, to onboarding acquired investment, and also with doing due diligence with the customers.

Private Equity Associate Salary

Glassdoor estimates the salary of a private equity associate in New York to be about $110,000 per year, on average. However, private equity associate salaries at firms such as Goldman Sachs can be much higher.

The Blackstone Group: $125,850 per year

Goldman Sachs: $154,025 per year

The Carlyle Group: $133,638 per year