What To Look For in a Private Equity Firm

Houston has some great investment opportunities, and the Bayou City has something to add to almost any portfolio, from the energy sector to the healthcare industry and more. While creating a diverse portfolio is easy, finding and managing your investments can quickly become a full-time job. 

This is why investors are turning to a private equity firm in Houston. However, there’s more than one private equity firm in Houston, so how do you choose the right one to grow and manage your investments? Here’s what every investor should consider when choosing a private equity firm.

Performance History

You can have a great experience with a private equity firm that’s just starting out, which may be a good option for beginners who are just dipping their toes in the investment world. Fees are often lower, and your portfolio may get more attention since the firm is still building up its client base.

However, most investors prefer more experience over novelty, especially when they have larger portfolios. So, how do you evaluate a firm’s performance history? There are a few factors to assess:

  • Experience in different sectors
  • Average equity check size
  • Geography
  • Common investment sources

You should also evaluate the performance of the lead investment professionals. These are the people responsible for the decisions regarding which industries are included in your portfolio.

Methods Driving Investment Values

Ideally, you’re going to want to work with a private equity firm that uses three key investment value drivers. These are using financial engineering to boost equity returns, portfolio-optimized buying and selling, and revenue growth using a variety of methods.

Financial engineering leverages both potential losses and gains to help increase return amounts. An effective private equity firm will use this leverage sparingly, combined with the other two drivers.

When it comes to boosting equity returns, your portfolio manager needs to have experience, and this is necessary for them to know when to buy and sell stocks. The goal is to purchase stocks at the lowest market price and sell them when the time is right. Knowing when to sell is a key part of any successful investment portfolio.

Revenue growth is something every investor wants and expects to see—after all, the primary reason for investing is to see a return. If your portfolio isn’t producing results, you’re losing money, which applies to every investor regardless of their respective portfolio size. Growing your return means the private equity firm is capable of making improvements, which can include streamlining associated costs, adding assets, and even changing out the members of your investment team when necessary.

Evaluate Benchmarks

Evaluating a private equity firm’s benchmarks goes hand-in-hand with its performance history. The primary difference is with benchmarks; you are only looking at a specific year.

A good tip to remember is to not focus solely on banner years, and this means not ignoring the years when investments were underperforming. The goal is to get a full picture of what the firm is capable of when the market is booming and when it’s in a downward trend.

Look at the firm’s strategies during these benchmark years—did the firm maximize its investments during strong market showings? What about when the market is down or stagnant? What strategies did the firm employ to optimize returns and minimize potential losses?

Making sure these strategies fit with your goals can help alleviate some of the stress and worry that comes with private equity investments. This, of course, applies to both individuals and corporations.

What About Unrealized Investments?

Some investment funds are unrealized, and this can negatively impact a private equity firm’s overall performance history. What are unrealized investments? This refers to investments that remain stagnant as the portfolio manager moves on to raising capital for other funds.

What metrics should you analyze? Review the stalled investments to see if they’re on track to create returns that will improve or at least support the fund’s valuation. Underperforming funds may be a sign that the portfolio manager does not have experience leveraging capital. The firm’s manager may also be working with an investor/company that doesn’t have the capital to support the funds.

Don’t be afraid to ask for clarification: the answer can determine if the manager is overwhelmed or simply undersupported.

Choose A Houston Private Equity Firm with Confidence

Whether the portfolio is company-based or individually owned, you want to work with an experienced private equity firm. You have multiple options to choose from in Houston, making it easier to find the right firm to support and grow your investment portfolio. 

With their expertise guiding you, you’re bound to earn returns that can help you grow your wealth in an effective and sustainable flame.