Asset Management vs Private Equity
By: Idaho Trust Bank Staff
The Difference Between Asset Management and Private Equity
There are two main types of investment strategies: asset management and private equity investments. While they may seem similar, a few key differences can help you determine the best strategy to achieve your financial goals.
Asset management is all about the harvesting and trading of stocks, bonds, and other assets that have an ongoing price in the market. The process involves buying assets at a low price and then selling them for a higher price at some future point in time to benefit from capital gains.
Private equity investments are made in nonpublic companies. These businesses are typically smaller or start-up operations with no widely held stock offerings.
The main purpose of private equity is to improve the operations of the investment and make it more profitable. Investors sell their holdings for capital gains once the business starts to turn a profit. Both asset management and private equity strategies offer ways for investors to create income from securities markets.
What Is Asset Management?
Asset management is a service that can be provided by a company or individual. For example, you may have your assets managed by a professional who, in turn, makes trades that benefit the value of your portfolio.
Since the investor will manage the assets and sell them at their highest possible price, you do not need to worry about researching market trends and making investment decisions.
An investment banker is someone who works for a financial institution that makes the majority of the firm’s profits by investing its clients' money.
The investments are made primarily in stocks or bonds issued by companies and government agencies. Investment bankers work with other professionals, like accountants and lawyers to create investment portfolios for their clients.
Financial advisors are professionals who guide financial decisions such as investments, retirement planning, estate planning, and more. They may work for a bank, brokerage firm, or insurance company. There are also plenty that work for private practices that assist individuals or small businesses in developing tailored investment strategies.
Asset Management Fees
Whether you are an amateur or expert investor, you’ll need to consider the fees associated with asset management and their impact on your returns. Here are a few of the fees you can expect to encounter:
Active Investment Management Fees
Active Investment Management Fees are the fees that a fund manager charges an investor for managing their money in the fund they've chosen. The fees vary based on the management strategy.
Passive Management Fees
Passive management fees are the money that is taken from a mutual fund, or any other type of investment vehicle, regardless of whether it's an index fund or an actively managed mutual fund.
Passive management fees can be charged in one of two ways:
- Charging an Assets Under Management (AUM) fee — This is usually in the form of a percentage that can range from 0.10% to over 2% of the total assets in the portfolio, or sometimes in the form of a flat fee.
- Management Expense Ratio (MER) fee — Ratio of total operating expenses to average net assets in the fund. It is usually calculated over one year or less and expressed as an annualized percentage.
A brokerage fee is a commission that an investment broker charges. They are often quoted as a percentage of either the gross or net purchase amount, and can vary depending on the type of service or the broker.
For example, if you want to buy 100 shares of XYZ at $10 each and your online broker charges a commission rate of 5%, it would deduct $5 from your bank account for every trade.
What Is a Private Equity Firm?
A private equity firm is a company that provides equity capital to risky ventures in exchange for an ownership interest. The firm then encourages and assists the management of the business venture.
The goal of a private equity firm is to purchase or invest in companies to take ownership, improve management or capital structures, and then eventually sell the investment for a significant profit.
Private equity firms are an excellent investment, especially for those looking to invest in their communities. Private equity firms partner with entrepreneurs, often those with a great idea but lack the resources or skills to grow their businesses. These companies can provide financial backing and managerial expertise in exchange for an ownership stake.
This relationship helps the company grow while helping boost economic growth in the community it serves. There are many different types of private equity firms depending on what they invest in but they all serve as investors in industries such as manufacturing, energy, technology, finance, and more.
- Private equity funds: Funds that invest in specific projects or companies intending to turn the investment into a profit.
- Co-ownership: Also known as a joint venture, co-ownership is the creation of a partnership with two or more companies investing in a project or company to later sell it at a profit.
- Direct ownership: Buying stock in a company and looking to get your investment back and more by selling the company stock, or the company itself.
What Is the Difference Between Asset Management vs Private Equity?
Private equity firms typically invest in young companies or start-ups by using personal money to purchase company shares, and then grow them via buyouts. On the other hand, asset management firms typically invest in older companies, but they use public capital rather than personal funds to purchase shares of the company and to help finance its growth.
Both allow investors to make money on their investments in the form of dividends or through the company's eventual sale. The main difference between both firms is that private equity firms are typically buyout investors. They usually purchase all or part ownership interests in companies to maximize the value of these assets over time.
On the other hand, asset managers primarily invest money on behalf of large institutions such as pension funds and endowments. Additionally, private equity firms will typically buy into and hold a position in a company anywhere from three to ten years, while asset managers tend to invest, sell and move on in a much faster time frame.
For example, an institutional asset manager will generally hold onto an asset somewhere in the range of three to six months. Private equity firms manage their assets directly and have more flexibility concerning when they can exit investments.
Who Can Benefit From Asset Management?
Any individual, business, or government organization could benefit from asset management. These companies can gain the power of leveraging their assets and free up capital for use in other areas.
This is a viable option for businesses that need to invest in specific projects but cannot meet their long-term goals through traditional channels such as bank loans or investments.
In some cases, companies can utilize asset management when they sell certain assets such as real estate or machinery.
Who Can Benefit From Private Equity?
Many types of businesses are well suited to private equity investments, including:
- Businesses with undervalued stock that needs restructuring — whether that be through bank loans or finances;
- Smaller companies hoping to grow by acquiring new business lines or creating a new product;
- Companies that have the potential to become a great business with some tweaking and restructuring;
- Companies that are trying to accelerate growth and acquire new business lines;
- Companies who want to expand into new markets or acquire other businesses.
Private equity investing can be a good option for businesses, both small and large, because it enables them to:
- Cut costs by streamlining their workforce;
- Acquire or acquire new companies or businesses;
- Hire short-term capital to expand their operation;
- Access new technologies;
- Acquire other businesses that can be a fit with their current operations.
Asset management and private equity can be smart investment options, depending on your financial goals.In either case, a qualified financial professional can help you determine which option is best for your needs.