Private equity can be a challenging field—large amounts of money being traded back and forth, often in high-risk environments, especially with the current state of the economy. So what can investors do to ensure at least a decent probability of big returns?
Chris Flowers, CEO of J. C. Flowers & Co., a private equity firm specializing in evaluating and analyzing risk, warns that the current economy makes private equity even more volatile than it’s been in the past. However, that’s part of the industry. “That you could design this so that there would never be another baking crisis again is a utopian idea. I guarantee that we will have another banking crisis,” he says.
Despite this, Flowers has been able to raise $15 billion in investments in financial services since setting up J.C. Flowers in 1998. His company’s investments include banks in the US, UK, Japan, Germany, and the Netherlands. So while Flowers understands that private equity can’t ever be completely risk-free, he also understands how to make solid investments by evaluating risk effectively.
Private equity involves shifting huge sums of capital, making it an ideal partner to development finance, which sets about strengthening the economies of developing countries. While private equity traditionally provides support for innovation in already-established companies, its focus on building company profitability and commercializing innovations can be useful in a variety of areas, including promoting sustainable development for third world countries and their economies. According to the Emerging Markets Private Equity Association, private equity put $14 billion into emerging economies in the first half of 2015.
It’s a good deal for private equity investors: high returns are extremely likely when hot areas like technology, renewable energy, and transportation are involved. The added bonus: thousands of jobs and overall country development.
“It’s about managing risk and achieving outsized rewards,” says Jeffrey Leonard, chief executive of Global Environment Fund, an energy-based private equity group managing $1 billion in assets.
Groups like J.C. Flowers & Co. and Global Environment Fund evaluate the risk involved with their investments in a variety of ways, including valuation price, the strength of the management team, and the overall business model. Because these firms are in it for the long haul, they look for investments that will appreciate over time–generally 8 to 10 years. And government policies matter, too.
Despite economic turmoil, the private equity market continues to grow. In 1980, investors committed a total of $5 billion; by 2007, that total was up to $35.9 billion. So for many, the reward is still very much worth the (well-considered) risk.