1. Characteristics of a Private Investment Company
2. Why Use a Private Investment Club
3. Private Equity Firms
4. Unit Investment Trusts

What is a private investment company? This term describes individuals who pool their money to invest as a group. These companies are often legally structured as partnerships. Sometimes, the members study and research specific investments and present them to the group. Other private investment companies employ a management group to manage their assets, commodities, real estate, stocks, bonds, and other investments.

Characteristics of a Private Investment Company

This type of investment company usually has fewer than 100 members, most of whom hold large investments elsewhere, and does not intend to make a public offering. Some of these clubs are limited in size and open only by application, while others are open to the public.

Private investment companies do not need to register with the Securities and Exchange Commission (SEC). That's because these individual investors are considered knowledgeable and do not require the same oversight as companies and amateur investors. One type of private investment fund is a hedge fund.

Common features of a private investment club include the following:

  • They issue a fixed number of shares within a limited time (close-ended structure). These shares are invested in private equity, venture capital, and commercial properties to provide a long-term return on investment.
  • They have an independent board of directors in place to protect investors. They meet a few times a year to review the company's performance and provide advice.
  • They are listed on at least one stock exchange.
  • Shareholders have the right to participate in the annual general meeting, vote for boards of directors, and make and vote on motions.
  • They can issue either regular shares to operate as a traditional investment company or multiple share classes. With the latter structure, funds are invested to generate shareholder income.
  • They can decide where shareholder funds will be invested from diverse choices that include property, venture capital, business, companies, or even specific geographic regions.
  • Fund managers are elected and are responsible for deciding what investments to buy and sell. Small investment firms may be self-managed.
  • They may engage in "gearing," in which money is borrowed by the company to make additional investments. This is designed to return shareholder funds through dividends and earn extra profit.

Why Use a Private Investment Club

When the real estate and stock markets collapsed in 2008, many investors lost faith in regulatory entities such as the SEC and stockbrokers alike. They may not trust brokers to act in their best interest. With this crisis of faith, a 2011 survey indicated that 58 percent of Americans no longer trusted the stock market and 44 percent would never invest in stocks. This leaves them in search of a new way to invest and growth their nest eggs.

Private Equity Firms

Private equity firms provide growth funding to companies by purchasing the company, investing in its growth, and then selling it for a large profit. These funds are typically used to buy equipment, lease or purchase space, hire employees, or otherwise support business growth.

Unlike private investment companies, which have a relatively low barrier of entry, private equity firms are generally limited to pension funds, large endowments, and very wealthy individuals. Smaller investment clubs may purchase shares of a company as an investment, but not the entire company.

These firms typically hire industry experts to investigate a company before purchasing the business in question. Their wealth and size allows them to conduct greater due diligence than is available to smaller private investment companies.

Private equity funds often place their own managers in the upper echelons of a company after they purchase it. These managers are directed by the fund's goals and not necessarily the founders' original mission for the company. In some cases, management that is already showing good profit and progress may be retained to maintain stable growth.

Unit Investment Trusts

Open-ended investment companies called unit investment trusts (UIT) trade shares at market prices on the stock exchange. They secure bonds and stocks in a fixed portfolio and are typically externally managed. As long as shareholders own units, they continually receive dividends. These units eventually expire depending on the investment instrument in question. This structure offers long-term advantages but is less liquid than other types of investments.

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