Understanding Private Equity

Walbrook Wealth ManagementApril 19, 2021

This fact sheet provides additional information to help with understanding the investment, tax and other financial planning concepts that we have discussed with you or included in your Statement of Advice.

Please contact your adviser if there is any aspect on which you need further information or clarification.

What is Private Equity?

An investment in Private Equity involves investment in companies that are not available for public investment via the stock exchange.

While an investor may directly invest in a private company, it is more common in a portfolio management sense to invest in a Private Equity fund or a fund of Private Equity funds, as outlined below.

Types of Private Equity Investment

  • Direct Investment
  • Private Equity Funds
  • Private Equity Fund of Funds

Direct Investment

An investor may take direct ownership of shares in a private company.

For many investors who are not actively involved in the target business, direct ownership is not feasible due to a lack of time, specialist knowledge and experience, and high minimum investment requirements.

Private Equity Funds

Private Equity fund managers pool the capital of multiple investors to build a portfolio of investments (typically 10-20) over which they exert significant control.

The fund is raised over a subscription period of 3-18 months, with investors making a commitment to invest a specific amount into the fund. The committed amount is typically not drawn immediately, with capital calls made to investors as investments are identified and acquired. This investment period can last up to 5-7 years from the close of the subscription period.

The fund manager seeks to maximise returns from each investment by implementing financial and operational restructuring, and other organisational improvements. The fund will distribute dividends from portfolio investments, however the bulk of the return is achieved by IPO or trade sale of the portfolio companies. This 'harvesting' of the portfolio companies typically sees the bulk of the returns to investors in years 4-7.

The term of a fund is usually restricted to 7 years, with options for extension out to 10-12 years in many cases.

Private Equity Fund of Funds

The manager of a fund of fund pools the capital of multiple investors to build a portfolio of Private Equity funds.

This increases diversification, reducing the risks involved in investment and manager selection, but adds a layer of fees and complexity.

Key features of Private Equity

Investment Horizon


Return Expectation

Predominantly capital gain, with dividend distributions as portfolio companies restructure or mature.

Market Expectation

Suitable for expectations of economic growth over the medium-long term.

Maximum Gain

The maximum gain is unlimited, comprised of capital gains and income.

Maximum Loss

Total loss of capital committed (not just capital drawn).

Profit / Loss

Returns are dependent on multiple variables, including quality of management at fund and company level, though typically independent of movements in liquid equity and bond markets.

Trading Process

An investor in a fund or fund of funds will typically invest via a private bank or financial advisor, who will prepare the application forms, arrange capital call payments and generally liaise with the fund manager on their behalf.

If an investor decides to sell their investment, they must find a buyer. Formal secondary markets are not common, and where a buyer is found the price offered is at a substantial discount to the Net Asset Value (NAV).

Trading Costs

Investing in and selling private equity funds create explicit and implicit costs for the investor. Private banks and financial advisers charge transaction fees for arranging the application, providing regular updates and administering capital calls for the investor.

The fund manager will typically charge a management fee of 1.00 - 2.00% pa, with performance fees (or "carry") charged on the total return to investors, above a pre-determined hurdle rate, at conclusion of the fund.

Advantages & Disadvantages


  • Returns are not typically closely correlated with traditional asset classes, providing a diversification benefit to portfolios
  • May allow for participation in markets that are difficult to access via traditional financial instruments.


  • Typically no secondary market, and where a secondary market exists there is low liquidity and wide spreads
  • Investment in a Fund or Fund or Funds may be required before investments or funds have been identified
  • Capital calls and other cash flows are not determinable before investment is made


Liquidity Risk

The risk that an investor cannot sell an investment at a fair price within an expected timeframe is called Liquidity Risk.

Listing on a stock exchange does not negate liquidity risk, as there still needs to be a willing buyer. It is common for the shares of small or micro companies ('small caps' and 'micro caps') to present liquidity risks, given there are few shares in issuance and trading volumes are low. Listed investment companies and investment trusts, especially listed private equity vehicles, may also present a liquidity risk.

Liquidity risk is even more prevalent in unlisted assets, including structured products and alternative investments such as private equity or real estate, where no secondary market exists, and the underlying assets are themselves illiquid.

Manager Risk

Manager Risk is the risk that an investment manager or investment management team fail to meet their investment objectives or drifts from their stated investment mandate or style.

Market Risk

The investor is exposed to the general economic environment, e.g. interest rate changes, exchange rates (when not denominated in home currency). The psychology of the market participants tends to enforce trends, and in a market of expectations, not all expectations may be rational.

Private equity funds aim at absolute returns independently of the market environment. However, some dependencies remain: the economic success of a company also depends on the general economic environment. When the fund exits one of its investments, it may necessitate waiting for favourable conditions on the public market, thus influencing the cash flow to the investors.

Company Risk

Company risk stems from the economic situation or environment specific to the company, including the quality of the company, its management and its competitors.

Company risk is an unsystematic risk, meaning that an investor can reduce its impact on a portfolio basis by including exposure to other companies, sectors and countries in your portfolio.

Legal and Regulatory Risks

Participation in offshore investment vehicles may be restricted by local legislation, and may also influence the taxation of Private Equity investments.

Important Information

Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. We have based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.

Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; Australian Financial Services Licence No. 512465). Walbrook Wealth Management (Credit Representative Number 534783) is authorised under Australian Credit Licence 389328.

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This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Version 4.0