Private Equity Industry

Private Equity Industry: Types, Deals, Processes

Direct investment is a special kind of transition of financial investments to real ones. An investor, buying a certain number of shares of an enterprise or organization that requires his participation in the process of managing them turns from a financial investor into a real investor. Learn more about the procedure, types, and types of direct investments here.

There are several types of investments – portfolio and direct. In the first case, it means buying shares of a public company without the right to manage it. For example, you can buy 10 securities of ten corporations. These can be Shares of Facebook, Apple, Google, Tesla, and so on. In this case, the investor can count on income from dividends, profit from the difference between the purchase price and the sale price. It has no impact on internal financial processes. Direct investment differs from portfolio investment: the investor gets a share in the project or company and can influence the business. Let’s take a closer look.

What is direct investment?

The main goal of an investor when using such a tool is to gain partial or full control over a company, project, startup, etc. To do this, you must buy at least 10% of the shares. However, the size of the company’s ownership interest for effective management may vary depending on the legislation of different countries. Often 10% is enough, but, for example, in Germany you need more than 20%. Nevertheless, the investment in this case is not necessarily made in the form of money.

Direct investment can be in the form of:

  • contracts for the supply of raw materials;
  • transfer of technologies and licenses;
  • issuing credit resources;
  • transfer of intellectual property rights;
  • provision of material and technical base, etc.

Direct investment is also an opportunity, in addition to the profit associated with stock growth and dividend payments, to receive a portion of the company’s income. The profit in this case can be distributed in accordance with the proportional share of the investor in the authorized capital or independently of it. Such a tool is not suitable for earning money in the short term.

Direct investment is usually used in relation to enterprises with clear and predictable development prerequisites and a detailed business plan.

There are also reverse situations. In this case, venture capital investments are used in new projects with good potential prospects. This method is considered high-risk. The investor acquires shares in startups, unusual high-tech projects that provide know-how in the market. Due to the high risk and the need for preliminary professional analysis, capital contributions occur mainly in the form of venture funds. It should be noted that direct investment is the effective management of a company, for example, through its representative on the board of directors. If the invested funds exceed 10% of the share capital, but the investor does not influence the project, then such investment does not apply to direct investment.

Answering the question of what direct investment is, it should be noted: foreign investment is often meant. They can be outgoing or incoming. In the first case, the capital is sent to another country, while in the second case it comes from abroad. This often takes the form of creating subsidiaries, opening branches, joint ventures, or acquisitions.

How to make direct investments

Although the duration of the funds’ existence is usually 10-12 years, they begin to return money to investors, usually after 3-5 years. In a mature investment portfolio of a management company containing several private equity funds, there is usually always enough money. If one of the investments made by the direct investment manager (management company) is realized by issuing and when placing shares on the stock exchange, the fund’s investors are sometimes offered shares of a registered company. More often, the shares are held in the fund until they are finally sold to the managers. Private equity funds have a small but growing secondary market. This gives investors the opportunity to withdraw from the private equity portfolio before the entire process is completed. However, secondary transactions in the case of direct investments most often occur at a reduced price, and investors should not rely too much on the secondary market.

Methods of direct investment

How can you make a direct investment? Through private equity funds together with other investors. Such funds are usually arranged as limited liability partnerships (stock method).

  • By creating a fund managed according to an individually created scheme for you by a private equity fund manager
  • Through quoted venture capital and development capital investment trusts (trust method).
  • Through a private equity fund managed by a financial advisor (fund of funds method).
  • By making direct investments in unquoted companies (direct method).