Private Equity Investment Trusts: Meaning and How They Work

Last updated on October 12th, 2024 at 10:58 pm

The stock market is a big world with many options available for investors to invest their money in. Private equity investment trusts (PEITs) help investors reach the underdogs of this world that are only known to some.

Private equity investment trusts (PEITs) provide access to private companies that are not listed on the stock exchange; these are small businesses, new businesses with lower potential, or they could even be the business of someone you know!

As these businesses are not listed on the stock exchange, it’s more difficult to research their share price history, but that’s where trust comes into play. These underdogs can have the potential to offer you big returns. In this article, we are going to study what private equity investment trusts (PEITs) are, how they work, and how they can boost your portfolio profile.

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What Are Private Equity Investment Trusts?

Private Equity Investment Trusts (PEITs) are firms that collect capital from several investors and then invest in the shares of small businesses that show potential.

The shares of these businesses are traded on the traditional stock exchange, and that’s the entire point of these transactions: to provide capital to small businesses and opportunities for investors to invest in such firms. The trust itself is traded on the stock market, which gives investors the chance to own a part of a trust that holds private company shares.

Private Equity Investment Trusts (PEITs) are quite popular in the United Kingdom (UK). They have several big PEITs established to invest in and help small private businesses like HarbourVest Global Private Equity and ICG Enterprise Trust.

How Do Private Equity Investment Trusts Work?

Private Equity Investment Trusts (PEITs) are publicly traded on the stock exchange, which means when people invest in it, they are actually investing in these small and private firms. So, when traders purchase the shares of these trusts, they are further invested in the shares of private companies. These private companies include startups, growing companies, or even more established firms that require additional funds to expand their operations.

Once the trust has invested the capital in these businesses, they help the company grow in order to increase the value of their shares. They usually appoint a manager who provides strategic advice for scaling their operations. And once the company grows to a certain point, the trust sells the shares for profit. It can be done in various ways, such as through acquisition by another company or when the private company goes public through an IPO (Initial Public Offering).

And once the trusts sell the shares of these companies, investors also get their share in the profit via dividends or increased share value.

Types of Private Equity Investment Trusts

• Venture Capital Funds: These trusts are focused on new businesses, start-ups, and other firms that are still in the initial starting stage and require substantial capital. These start-up firms are high-risk, high-reward options.
• Buyout Funds: Here, the trust purchases well-established companies that need improvement or are going into loss. The trust purchases these companies, helps them become more efficient, smoothens their operations, and helps the company get back on its feet and start making a profit. Once the company start making decent money, the trust sells the company for a profit. As the company is well established beforehand, this option is less risky.
• Growth Equity Funds: The trusts invest in well-established and financially sound companies that need additional capital to expand their operations.

Advantages of Investing in Private Equity Investment Trusts

Access to Private Companies

Several private businesses are not traded on the stock exchange, which means investors may be missing out on many well-performing firms. Private Equity Investment Trusts help investors invest in these untapped companies with the potential for high growth.

Diversification

One of the main advantages of PEITs is its ability to reach into the darkness of the market, where several small businesses with a lot of potential are lying. These trusts can help you reach these businesses and give an entirely new class of assets to your portfolio.

Most of these firms are not necessarily tied to market fluctuations, making them more attractive for better returns. You can select the trust per the type of businesses they invest to balance your portfolio per your goal.

Potential for Higher Returns

Private firms have untapped potential with a lot of room for improvement, which makes them a very interesting option for investors. A firm with a lot of room for improvement means they have a very high growth potential.

Private Equity Investments Trust (PEITs) helps these firms grow by assigning a fund manager who offers advice to these firms about how they can improve and grow. This direct involvement makes it safer as we know that one of the managers is controlling the company’s actions, which means it’s likely to grow well.

Discount Opportunities

Many trusts trade their shares at a discounted price, which means they can be trading a $100 share at $85. These discounted shares offer more room for higher growth potential.

The Risks of Private Equity Investment Trusts

Liquidity

Private Equity Investments Trusts (PEITs) take a very long job with their investments in small businesses. This means that they need time to improve their business operations and share value. The potential for growth is high, but it also comes with a longer waiting period.

Investors who are looking for quick growth or need to cash out quickly won’t benefit from PEITs because of their slow growth. However, if you want to trade on a short-term basis, the trust is traded on the stock exchange, which means you can take advantage of their price fluctuations.

High Fees

These trusts are taking a lot on their hand, and improving and expanding the business requires a substantial amount. In order to raise enough funds, they often charge higher fees than other investment options.

Economic Volatility

Small businesses aren’t as sensitive to market fluctuations as other big firms, but they are still subject to economic risks. If the complete market is overturned or goes down, these businesses will also be affected. But this is a risk associated with every investment.

Limited Transparency

Investing in such trusts means you are providing capital for the growth of small private businesses. As these businesses aren’t directly being traded on the stock exchange, they have no obligation to provide details about how they are working and how well they are performing.

It means that you simply have to trust your invested PEITs that can do a good job and turn your invested capital into something big.

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Frequently Asked Questions (FAQs)

Final Statement

Private equity investment trusts (PEITs) provide a very dynamic opportunity to investors who invest for a long time. These trusts invest in small, private businesses and convert them into something big, which they then sell to increase the value of their shares, printing the trust and its investors.

These trusts not only offer access to small firms but also give investors the chance to invest in something that has higher growth potential than the stocks that are being traded on the stock exchange. But, with its slow growth, it pushes short-term investors out.

So, if you are a long-term investor looking for a high-risk, high-reward opportunity, Private equity investment trusts (PEITs) are your chance to dive into the unknowns of the trading world and earn big.