- An explanation of what private investment funds are, how they work, and what advantages they offer to the parties involved.
- This article is aimed at asset managers who want to understand the benefits of private investment funds and their characteristics to build more comprehensive strategies.
- FlexFunds offers an asset securitization program that helps improve the liquidity of many private investment funds. For more information, please contact our experts.
Private investment funds are used as vehicles to finance various types of projects and represent a useful solution for raising private capital.
Additionally, they are considered an alternative to traditional investment for those seeking returns and diversification.
For this reason, they cover a market that continues to grow. In fact, according to the latest data collected by the U.S. Securities and Exchange Commission (SEC), the total number of private investment funds increased from 23,000 in 2014 to over 50,000 in 2024.
Due to their popularity, it is important to understand exactly how private investment funds work, what advantages they offer, and how to improve their liquidity to reach a larger client base.
What are private investment funds?
Private investment funds are vehicles created to raise capital from multiple investors.
What defines these funds is precisely that their shares are not open to the publicâthey are privately placed, managed by closed-end corporations, and their issuances are limited.
If a private equity fund exceeded the maximum number of allowed contributors, it would be subject to the regulations applicable to regular investment funds, where shares are publicly offered.
The importance of private investment funds
Due to their private nature, these funds have greater flexibility to include various types of assets in their portfolios. For this reason, they are associated with alternative investment projects , innovative initiatives, and emerging companies.
Because of this feature, the market demands private investment funds. Together, they already exceed USD 15 trillion in net assets under management in the United States, where this sector is more developed.
How do private investment funds work?
The operation of a private investment fund is similar to that of a regular fund, although it has several distinguishing features.
Basically, it resembles a conventional fund, but differs in its time horizon, liquidity, and risk-return profile, as it is oriented toward generating value only in the long term.
What do private investment funds invest in?
Private investment funds typically direct their resources toward alternative assets:
- Private equity: They acquire stakes in established companies to restructure them, optimize profitability, and eventually sell them at a higher value.
- Venture Capital: They finance emerging companies with high growth potential, taking on higher risk in exchange for the possibility of exponential returns.
- Real estate: They aim to generate returns through the purchase, development, management, or sale of real estate assets, either for periodic rental income or appreciation.
How are private investment funds managed?
As with any investment fund, the portfolio is managed by a professional.
This professional is responsible for the effective execution of the strategy and for making decisions in accordance with the applicable laws of the country. The manager is compensated with a fee, while profits are distributed among the fundâs participants.
However, unlike conventional funds, these vehicles usually have a fixed term, generally 10 years. Their shares are not traded, and they do not have a daily net asset value (NAV). Redemptions against the fundâs assets do not occur, and the transfer of shares is usually restricted.
What are the advantages of private investment funds?
Private investment funds offer investors a range of benefits not always available in traditional mutual funds:
- Diversification: These funds allow access to alternative assets that are not directly available in public markets.
- Professional management: Fund administration is handled by experts in restructuring, business growth, and real estate and venture investments.
- High potential returns: By investing in high-value projects, potential returns can exceed those achieved in traditional markets.
Taxation of private investment funds
These funds also have tax advantages, as their earnings are added to the fundâs assets if not distributed periodically. Thus, participants do not need to declare these earnings, and there is no tax impact on them.
Institutionalization of private investment funds
These vehicles have solid institutionalization, providing greater stability and credibility to the investment strategy and increasing their appeal to contributors.
Additionally, the benefits extend to the companies, projects, or assets in which they invest. With a capital injection, they gain competitive capacity and enhance their potential to generate profits.
How to improve the liquidity of private investment funds?
Private investment funds offer many advantages for asset managers, but liquidity is not one of them. Fortunately, this variable can be optimized through an asset securitization program, such as the one offered by FlexFunds.
At FlexFunds, a company with over USD 6 billion in securitized assets and more than 500 issuances across over 30 countries, we convert illiquid assets like private investment funds into bankable assets with their own ISIN/CUSIP codes.
By adding greater negotiability, the resulting ETP removes many bureaucratic barriers and can access multiple financial sources.
These solutions can also use a broad selection of underlying assets, allowing for specific and customized options.
FlexFundsâ comprehensive service also includes:
- Stock exchange listing
- Fund accounting
- Back-office services
- Net Asset Value (NAV) calculation
- Corporate administration services
To learn more about FlexFundsâ solutions and our asset securitization program for private investment funds and other assets, please contact our team of specialists. We will be glad to assist you!
Sources:
- https://www.sec.gov/data-research/statistics-data-visualizations/private-fund-statistics
