Owning a business is not for everyone. A tremendous amount of work is necessary to drive a business into profitable margins. Access to liquid capital is also required to keep a business afloat. Making money, as the saying goes, requires spending money and spending it wisely. Where do business procure the money needed to spend on day-to-day operations? Funding could come from all sorts of different sources. Investment capital is one of those sources.
And the opportunity to be an investor opens doors for someone wishing to become involved with a business to do so. Private equity investments are a vehicle to make the opportunity happen.
Private Equity Ventures
Private equity investments take a number of forms. In general, investing in private equity projects entails investing a business that is not publicly traded. The investor receives a return on the investment if the business venture is profitable. One common form of private equity investing is oil drills and wells.
Exploratory oil drilling is extremely expensive. Smaller oil companies may sell ownership in their drills under the SEC rules regarding private equity investments. Yes, there is an incredible number of rules associated with private investments. These rules are in place to protect investors. Investors cannot be protected from risk. Risk, in private equity investments, is unavoidable.
Risk and Private Equity
Putting $50,000 into an oil drill is not exactly akin to a conservative investment such as a savings bond. Oil wells that turn up dry deliver losses. Oil wells hitting gushers could pay massive dividends. A 25% return on investment would not be out of the realm of possibility. The nature of private equity investments is one of high risk and high reward. Since the risks are significant, private equity investments may be limited to accredited investors — investors with massively high net worths. This is not done to limit access to a select few. Rather, the idea at work here is to limit the opportunity to those who could afford a loss.
Selling a private equity investment is not easy. Again, the investment is not a publicly traded one. If the investment is doing poorly, finding a buyer for a private sale that transfers ownership is going to be difficult.
Determining the Right Path
Rushing into a private equity investment would not be advisable even when the investor is able to absorb losses. Serious thought has to go into any decision to invest in a private equity endeavor. Consulting with an experienced financial adviser prior to making such an investment may be a wise move. Whether making a first-time private equity investment or a new one, any decision arrived at has to be carefully considered.