Tyler T Tysdal states private Equity firms can make you an extortionate amount of money, but what are they. They are formed by a group of people who have money to invest and they would rather invest in in business than in stock. They usually like to have quite a tight rein on the business they are investing in. Thus, they usually buy the business. The group are usually made of very wealthy people and successful business men. So, the PE funds are put into the business which then enhances the company value.

The aim of the fund is that the investors make money when the company is sold, and the hope is that its value has increased significantly between set up and selling. If it doesn’t then the investors can lose money and that is why it is a high-risk investment. PE investors will use their own money, and some may also be leant so that the business can be bought.

PE is sometimes criticized as it can lead to job losses, but the counter argument is that those jobs would have been lost anyway as the owners wanted to sell their business and also PE will create jobs. If the company just went bust, then no jobs would be created at all.

PE companies will get paid by receipt of an AMF or annual management fee based on the amount invested. For the bigger funds this can be almost two percent a year. There is also a payment of about twenty percent of the profit of the investments that is shared between the group of investors. Some people fear they are illegal, but this is far from the truth. There is a lot of scrutiny and requirements for record keeping of PE funds to avoid there being any questions or problems. Some question the large dividends that the bosses of the PE can be paid but this is the way that they work and the way that they are allowed to work. The PE funds may encourage the companies to borrow more money against the business to pay themselves, but the money should all be recouped and redistributed in the end when the business is sold and makes a profit

In the US hedge fund and private equity fund investors will pay a lower income tax on the PE executives along with hedge fund executives, the reasoning that they give for this is that these individuals are taking a chance investing in failing business or in the case of hedge funds new business. The new business may have some revolutionary ideas and bring some great inventions. They may make the investors millions, or they may lose everything So the government believe that they deserve a tax break due to the risk they are taking.

The performance of PE funds has been very good over the last couple of decades and the average return has been just under thirty percent when you are lucky to get five elsewhere. So, these high-risk investments can definitely be worth that risk.