Minority investment in private equity companies has become an increasingly popular strategy for investors looking to gain exposure to private markets. As the name suggests, minority investing involves taking a non-controlling stake in a private company. This provides several advantages compared to traditional private equity buyouts, while still allowing investors to benefit from the high growth potential of private companies. In this article, we will examine the nature of minority investments in private equity, their risks and returns, and the types of firms that engage in minority investing. We will also look at how minority investments fit within a broader private equity portfolio, and why this approach is gaining favor among institutional investors and family offices.
The nature of minority investments in private equity
Unlike traditional leveraged buyouts, minority investments do not involve acquiring a controlling stake or majority ownership of a target company. Instead, private equity firms acquire a minority shareholding, typically ranging from 10% to 30% of a private company’s equity. This is usually achieved by investing in a specific round of the company’s fundraising such as Series A or Series B. Minority investments allow private equity firms to gain exposure to high-growth private companies without bearing the full risks and costs of a buyout. It also provides capital to founders and entrepreneurs while allowing them to maintain control of their business.
Risks and returns of minority private equity
Because they do not take full control, minority investments offer lower risk compared to traditional private equity buyouts. However, expected returns are also lower as investors cannot implement drastic changes in strategy or operations. Minority investors also face more uncertainty compared to later stage investors, as the company’s growth trajectory is less proven. However, successfully identifying and investing in the top early-stage companies can result in outsized returns. While individual deals carry higher risk, portfolio returns for minority investing can be compelling, with median net IRRs of around 20% reported by industry surveys.
Types of firms engaging in minority investing
Many prominent private equity firms have minority investment programs, including KKR, Blackstone, and Carlyle Group. However, minority investing is more commonly associated with growth equity firms, who focus on backing rapidly expanding private companies. Venture capital firms also frequently make minority investments in early and growth stage technology companies. In addition, family offices and institutional investors like sovereign wealth funds have been increasing their allocations to minority stakes in private companies.
Role in a diversified private equity portfolio
For private equity investors, minority stakes can enhance portfolio diversification. The non-controlling nature provides some downside protection compared to buyouts. Minority investments also increase exposure to fast-growing tech and healthcare sectors that are typically underrepresented in buyout portfolios. Blending minority investments with traditional leveraged buyouts allows investors to tap into different segments of the private markets.
Minority investments allow private equity investors to gain exposure to high-growth private companies while taking a more measured level of risk. As private markets continue to grow, minority investing provides valuable diversification and direct access to emerging tech giants and innovators.