Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who owns 1 percent of shares and have full liability. The latter is also responsible for executing and operating the investment.
A foreign fund is a fund that invests in companies outside the investor’s country of residence. Foreign funds can be mutual funds, closed-end funds or exchange-traded funds. They are also known as international funds.
BREAKING DOWN Foreign Fund
Foreign funds offer individual investors access to international markets. International investing poses risks, but it can also help investors diversify their portfolios. International funds can help investors broaden their investment horizons, resulting in a higher potential for return. For U.S. investors, international funds can include developed, emerging or frontier market investments. Investing in these markets can offer higher return potential and diversification, but they can also increase risk.
Risks Associated With Foreign Funds
International fund investing can offer higher returns, but it usually also comes with more risk. As a higher-risk investment, it is generally best used as an alternative to long-term core holdings. Some factors that can increase risk include currency and changing economies. Currency is generally a concern when investing in any type of international investment because currency volatility can affect the real returns of an investor’s portfolio. Changing economies are also a factor and require consistent due diligence because changing regulations and legislation can affect the economic trends of international market countries.
Foreign Funds vs. Global Funds
Foreign funds consist of securities from all countries except the investor's home country. These funds provide diversification outside the investor's domestic investments. If an investor currently holds a portfolio consisting mainly of domestic investments, he or she may choose to diversify against country-specific risk and purchase an international fund.
Global funds consist of securities in all parts of the world, including the country in which the investor resides. Global funds are chosen primarily by investors who wish to diversify against country-specific risk without excluding their own country. Such investors may already have a lower-than-desired concentration of domestic investments or may not want to take on the high level of sovereign risk involved in making foreign investments.
Debt and Equity Foreign Funds
Debt and equity funds are the two most common foreign funds. U.S. investors seeking to take more conservative bets can invest in government or corporate debt offerings from various countries outside the United States. Equity funds offer diversified portfolios of stock investments that can be managed to a variety of objectives. Asset allocation funds offering a mix of debt and equity can provide for more balanced investments with the opportunity to invest in targeted regions of the world.
Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take just a monetary form; it can be provided in the form of technical or managerial expertise.
Though it can be risky for the investors who put up the funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans or other debt instruments. The main downside is that the investors usually get equity in the company, and thus a say in company decisions.