Private Equity Investments

Risks: A Look at What it Entails and Whether it's Suitable for Your Financial Plan

- Hardi Swart

Recently, a popular private equity firm made headlines, but not for the right reasons. My first experience with the company was when I inherited an elderly client who had two-thirds of her retirement portfolio invested in its funds.

She had no idea what she was invested in or the risks associated with the investment. The broker who sold her the investment earned a 4% upfront commission on her portfolio. On her R20 million investment, he pocketed R800,000.

I couldn't help but feel the broker had failed to act in her best interest. When I reviewed her portfolio, it became clear that it didn't align with her risk tolerance or financial needs.

I recommended moving her portfolio into a lower-risk, highly regulated investment that suited her goals.

However, both she and I were shocked to discover there was an 18% penalty for withdrawing her funds within the first two years.

I found that while she was sold the fund as a "low-risk investment", the private equity fund was investing in early-stage startups—a category that is anything but low risk. This experience underscores the importance of understanding what private equity entails and whether it's suitable for your financial plan.

Private equity (PE) involves investing in privately held companies, often through funds managed by private equity firms.