When evaluating private equity firms as investments, it is important to understand that they don’t profit by being “vultures.” While holding such a view might be a valid political stance, it can be a risky investment perspective.
Private equity companies primarily earn their profits by increasing the value of their assets. They structure their deals so that even a small rise in asset value can lead to significant returns. If you expect the economy to decline, private equity investments might underperform compared to the broader market. Conversely, if the economy improves, private equity investments might outperform. The performance of the private equity firms themselves is secondary to this, and whether this holds true in practice is something I haven’t researched. But if you are betting on market fundamentals, this is a useful framework to consider.
Private equity investments are typically made through limited partnerships. To participate, you need to be an accredited investor which means having significant financial resources, be prepared for a more complex tax situation including the K-1 tax form, and be willing to commit to at least a 10-year investment with no option for early withdrawal. Additionally, there is often a lack of transparency about what you’re investing in, and you will generally need a financial advisor to help you get involved.