Review: Private Equity - Direct Investing, Fund Investing, Co-investing and Secondary Investing

Review: Private Equity - Direct Investing, Fund Investing, Co-investing and Secondary Investing
Investors can invest in private equity in four different ways:
Directly, funds, co-investments and secondaries.
Direct investing is when an investor directly invests in private companies. It could be buying the entire company or a minority investment.
Fund investing is when an investor goes to a private equity fund and the private equity fund buys companies on the investor’s behalf.
Co-investing is the most complicated option. For example, an investor invests $50 million in a private equity fund with co-investment rights, meaning that when the fund looks for opportunities it can allow the investor to participate not only through the fund, but directly as well.
An example of this would be when a fund is looking at investment in a $40 million company. That investment needs $30 million equity and $10 million in debt. The equity portion given by the fund (without co-investing) would be $30 million dollars. In the case of co-investing, the fund gives $20 million (in which the investor is participating through the fund) with the remaining $10 million (i.e. The difference between the $20 million in equity given by the fund and the $30 million equity needed) is offered to the investor to do on a direct basis resulting in the fund investing $20 million and the investor investing $10 million.
When investors invest into a fund, they pay full fees, typically paying a 2% management fee and a 20% performance fee (i.e. “two and twenty”). By investing $10 million directly, other than a small deal origination fee, investors are able to reduce their overall fees. (For more on fees see Video #4).
The fourth way to invest in private equity is through secondaries. In this example our investor makes a commitment to invest $50 million in a private equity fund by giving about $10 to $20 million dollars to the private equity fund up front for the first two fund investments. As more acquisitions are made, the private equity fund makes capital calls to the investor. The investor is usually locked into the private equity fund for seven to ten years (or longer). If the investor wants out of this agreement, the commitment can be sold to other investors. The sale can be of the entire commitment (which would include the existing deals that the private equity fund was already made, plus future capital calls) or it can be done through a structured secondary (selling different parts) where the investor may want to keep the existing investments and just sell the future commitments. As easy as an investor can sell a secondary, it can buy one as well.
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[@sholaog-7779]

Still good. I am watching all videos , all over again. Starting from the first video. Evergreen.!!!

[@bradsweezey686]

Excellent series Steve both in content and teaching style. Slowly getting rusty after leaving the industry and this was 45mins very well spent to refresh what originally took a decade to fully understand. Thanks for sharing this.

[@SteveBalaban]

Thanks a lot Brad. I really appreciate it!

[@fidelemighty3368]

I just learned a lot about private equity in a few minutes by watching your videos. Thank you so much.

[@SteveBalaban]

Amazing Fidele. Thanks for letting me know! I'm happy to hear!

[@GRYDE2000]

Awesome series! Short and to the point

[@SteveBalaban]

Thanks for the feedback!

[@gazchao]

Big thank you to you. Sir. Great help.

[@SteveBalaban]

Thanks a lot, Gaz!

[@nishantsharma2654]

Thank you Mr Balban for the whole series. It was very useful and I really like your style of sharing knowledge and the content.

[@SteveBalaban]

Thanks for your feedback Nishant. I love making the videos!

[@qikong7269]

Thank you so much for sharing all these videos! They helped me a lot throughout my interview prep

[@SteveBalaban]

Hi Qi, That's great news! Thanks so much for letting me know. I hope that the interview went well!

[@victorzhao4665]

Very nice videos! thanks a lot Steve

[@SteveBalaban]

Thanks so much, Victor!

[@rodrigogallardo1992]

Thank you Steve, this is helping me in my MBA Entrepreneurial Finance class, it would be nice to have a whole video dedicated to Secondaries, which seem more complex.

[@SteveBalaban]

Thanks Rodrigo. Great timing! We just posted a new video on Private Equity Secondaries last month. Please see it here: czcams.com/video/nXmUgrnHWEc/video.html

[@rodrigogallardo1992]

@@SteveBalaban I'll take a look, thank you!

[@alishanaa9943]

Excellent explanation!

[@SteveBalaban]

Thanks Ali!

[@cosmasmwamwembe3409]

I wish you were releasing videos everyday

[@SteveBalaban]

Thank you Cosmas. I'm working to release videos more often. I appreciate your message!