Yes, it is possible for one to go into private equity investment from asset management. This is because private equity is nothing but one of the investment strategies utilised in asset management for growing and managing the resources and assets of their clients.
Difference Between Private Equity and Asset Management
Investors usually look for various public securities and assets in which they can invest to generate good returns. For that, they need first to identify the market and then make an investment in various asset classes.
However, there are some investors who do not have enough knowledge and time for making such crucial investment decisions. Due to lack of time, they even fail to manage their investment portfolio and take control of their investments. But this does not prevent them from indulging in the investment process.
These investors usually rely on different firms like asset management and private equity for receiving professional services. But before choosing the right firm for their investment, it is important for investors to know the difference between private equity vs asset management.
What Is Asset Management?
In finance, asset management is a practice of multiplying total wealth over time through managing, acquiring, and trading investments that can probably grow in value.
This service is offered by several asset management companies and professionals to individuals and organisations for managing their investment portfolio and maximising its value while mitigating risks.
What Is a Private Equity Firm?
A private equity firm is a company that invests capital or money in some risky, financially struggling companies to gain ownership interests. Here the goal of the firm is to assist the company’s management in improving its capital structures and then reselling them eventually to gain a significant profit.
These private equity firms usually partner with those entrepreneurs who lack the necessary skills and resources but possess a great idea for growing their businesses. Thus, in exchange for an ownership stake, these firms provide managerial expertise and financial backup to the financially struggling companies in which it invests.
Difference Between Asset Management and Private Equity
Though in most cases private equity vs asset management seems similar, they significantly differ in their methods of operations.
Invests for a comparatively shorter timeframe
These firms usually invest for a longer timeframe, i.e. for a period of 3 to 10 years.
They deliver value to both large and small organisations, insurance companies, pension fund organisations, government institutions, and high-net-worth individuals.
They usually cater to struggling companies.
An asset management company usually focusses on everything about the personal finance of its clients.
A private equity firm focusses mainly on the investment made by their clients.
Investments made by them
They never make investments primarily but do it on behalf of their clients.
They make investment in companies as primary investors.
Helps the clients in achieving asset appreciation.
Acquires capital from wealthy investors and provides them with a profit within the mentioned timeframe.
An asset manager is usually liable to hold on to an asset, usually between three to six months.
As they manage their assets directly, they are more flexible in terms of when they can make exit from their investments.
Nature of investment
Investments made under asset management are quite diversified.
Investments made under private equity possess a higher level of control.
How Does an Asset Management Company Work?
An asset management company successfully serves the investment needs of an organisation and high-net-worth individuals. They do so by placing their deposited amount into the money market funds for generating higher returns.
Their working process involves the following steps:
Step 1: Identify and Evaluate the Assets
Before managing the assets, an asset manager should primarily identify the types of assets available and what should be done with them.
After the identification of assets, they will evaluate each asset by analysing financial statements and other information relevant to it. This will help in determining the actual value of the assets.
Step 2: Classify and Select the Assets
After doing so, the assets should be classified depending on their return potential, liquidity, and level of risk involved. Through this classification, the asset manager will be able to access the best investment strategy as per the individual assets.
Now, the asset manager will consider the risk tolerance, time horizon, and objectives of the investor. Based on these factors, they will choose the most appropriate asset that should be included in the client’s investment portfolio.
Step 3: Asset Maintenance
After the selection of assets, the asset manager will monitor and evaluate the asset’s performance on a regular basis. They will also evaluate the asset’s depreciation rates, their overall impact, and the potential risks associated with each of them.
This will help them in assessing whether the assets are performing as per their expectations or not. Thus, they will be able to make the necessary adjustments as and when required.
Step 4: Predict the Asset Value
Here the manager analyses the economic indicators and trends in the market to predict the asset’s future value.
What Is the Fee Structure of Asset Management Professionals?
The fees associated with the asset management include the listed below:
Active Investment Management Fees: A fund manager charges these fees to the investor for managing their assets in an investment portfolio.
Passive Management Fees: These fees are taken from any type of investment vehicle, be it an actively managed mutual fund or an index fund. It can be charged either as Assets Under Management (AUM) fee or Management Expense Ratio (MER) fee.
Brokerage Fees: An investment broker charges these fees as a percentage of the net purchase amount. Thus, it varies depending upon the broker and the type of services they provide.
How Does a Private Equity Firm Work?
Private equity firms have been a preferred option for many investors because they implement various investment strategies like venture capital, leveraged buyouts, etc. to achieve their goals. Also, these firms offer a limited range of investment options.
These firms invest in private businesses by raising money from different institutional investors like sovereign wealth funds, pension funds, insurance companies, etc. They do so for the purpose of reselling them after some years with the aim of generating better returns than one can generate from investing in public markets.
What Is the Fee Structure of a Private Equity Firm?
The fee structure of a private equity firm generally depends upon the General Partner’s previous performance. Furthermore, the fee structure is divided into performance and management fees, both of which are discussed hereunder:
Performance Fees: In the initial investment memorandum, the exact nature of these fees is outlined. It completely depends on how the investment works. Usually, the fee involves 5% of the profit returned to the investors, and the rest of the profit is divided between the GP and the investors.
Management Fees: Depending upon the private equity fund size, these fees range from 0.5% to 3%. Usually, it covers the operational expenses of the firm.
Private Equity Vs Asset Management: Which Is Better for Whom?
Between private equity and asset management, the former is well suited for those businesses that possess undervalued stocks and is in need of restructuring. Apart from these, it is also a viable option for those companies who want to acquire other businesses, accelerate their growth, expand into a new market, or need some restructuring and tweaking.
However, asset management is the most convenient option for those individuals, government organisations, and businesses that tend to make investments in certain projects but fails to meet their long-term goals through traditional options like bank loans, etc.
Both private equity vs asset management is considered smart investment options for growing the financial portfolio of a client. But which option will be suitable in your case depends upon your financial goals. You can take the assistance of a qualified and experienced financial professional for determining which option will be the best as per your requirements.
FAQs on Private Equity vs Asset Management
The similarities between private equity and asset management are as follows:
- Both of them aim to make returns on their investments
- Both focusses on managing investments
- They both make investments with the goal of making huge profits for their clients.
Though both private equity and asset management are methods of growing the financial portfolio of a client, the former is actually a type of asset management. In fact, asset management, being a broad term, encompasses various strategies that ensure significant growth in the portfolio of their clients.
The four tools of asset management are as follows:
- Reliability-based monitoring and analysis
- Time-based monitoring and analysis
- Condition-based monitoring and analysis
- Predictive monitoring and analysis
Other Important Guides About Wealth Management
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