Asset Management Firm Vs. Private Equity Firm: What is the Difference?

Investors looking to invest in various securities can do so individually. Usually, they can identify a market or investment class and acquire assets within it. By doing so, they can control their investments and trade when they want. 

Moreover, investors can use apps or software that help them in the process. This process is accessible to anyone. Therefore, anyone can become an investor and start investing in different asset classes.

However, some investors may not have the time or knowledge to make investing decisions. That does not exclude them from the process, though. Instead of indulging themselves, investors can rely on firms that invest for them. They can receive professional services, although they may lose some control. In that regard, investors can choose between various options.

Investors prefer to obtain services from asset management and private equity firms. While they work similarly on the outside, they differ significantly due to their operations. Investors must know their differences to choose the right firm for their funds. 

Essentially, private equity firms are a type of asset management firm. However, it is not possible to understand their differences without discussing them individually.

What is an Asset Management Firm?

An asset management fund invests pooled funds from clients in different markets. Usually, it includes stocks, bonds, real estate, master limited partnerships and much more. Also known as asset management companies, they work similarly to other funds. These firms collect finances from various investors. Once they do so, they pool those finances and invest them in different assets.

Asset management firms manage a wide range of portfolio securities. They also handle hedge funds, pension plans and create pooled structures. Usually, these structures come in the form of mutual funds, index funds or exchange-traded funds. Asset management firms manage these assets in a centralized portfolio. Collectively, these firms are also called money managers or money management firms.

Asset management firms gather a large pool of resources from various investors. Usually, these investors may include affluent individuals or institutions. However, these firms may also provide other investors access to their services. When these firms collect sufficient resources, they identify and invest in various investment classes. Once they do so, they manage those resources to meet a predefined objective.

Asset management firms may represent a wide range of operations. Usually, many of these firms focus on a specific investment area. On top of that, they come in many different forms and structures. By doing so, they provide their investors with more specialized services. These firms also receive their name based on the area where they are active.

Asset management firms hire investment professionals with broad market expertise. They utilize complex diversification and investment strategies to generate returns for investors.

In exchange, they receive fees that may depend on their performance. In some cases, they also charge a percentage of the portfolio or pool they manage. Overall, asset management firms as essential to help investors fund their money and invest them.

What is a Private Equity Firm?

In essence, a private equity firm is an asset management firm. These firms focus on a specific area, which includes private equity. Private equity firms are more specialized and do not offer a broad range of investment options. Instead, they pool investors’ funds and use them to acquire private equity assets. These firms work similar to other asset management firms but may differ.

A private equity firm provides financial backing to startups or small companies. These companies may not have reached their full potential. Therefore, they offer a substantial incentive for growth. Private equity firms use a variety of loosely affiliated investment strategies to achieve their objectives. These may include leveraged buyouts, venture capital and growth capital. These strategies can be crucial to generating returns for investors.

Private equity firms have long been a preferred option for many investors. However, these funds are not open to all investors. Instead, private equity firms only collect finance from institutional or affluent investors. 

Due to the higher capital requirements in this industry, private equity firms require more funds. Therefore, they rely on their investors to take higher risks and provide the necessary finances.

Like asset management firms, private equity firms also receive fees for their managerial services. These firms employ highly skilled and professional employees that can provide those services. 

In most cases, these firms utilize various revenue streams to make money. Some of these streams are also unique to private equity firms. One such stream includes initial public offerings. Therefore, other asset management firms may not utilize them in their operations.

Overall, private equity firms focus on investing in private companies. These firms do not follow the same asset classes that others may prefer. Therefore, they neglect investments in stocks, bonds and cash.

Instead, private equity firms operate through alternative investment options. These firms primarily acquire stock in private companies with significant potential. In that regard, they are similar to other asset management firms.

Asset Management Firm Vs. Private Equity Firm: What is the difference?

Essentially, asset management and private equity firms are the same. Private equity firms are a part or type of asset management firms. However, these firms differ significantly from the other asset management firms. Private equity firms take a more specialized approach towards investing compared to asset management firms. Therefore, they may also have more specific processes involved in investing.

Some of the primary differences between other asset management and private equity firms are below.

Focus areas

Asset management firms usually focus on several asset classes. Generally, an asset management firm may incorporate a wide range of asset classes within investor portfolios. Some of these firms also take a specialized approach. 

For example, hedge fund firms focus on derivatives. Private equity firms also take a different route than other asset management firms. Private equity firms focus on private companies.

Returns

Typical asset management firms may provide more steady returns to their investors. These firms invest in traditional investment classes, providing investors more assurance on their income. 

However, they may not focus on increasing those returns. Private equity firms can increase the potential income that investors can make through their investments. Nonetheless, they also provide higher risks, which can discourage some investors.

Fees

Asset management firms usually use two primary income streams. These include management and performance-based fees. While these streams can fund their operations, they might provide limited options for income. Private equity firms, in contrast, may have more income streams. 

While these firms incorporate the same fee structure as above, they also have unique sources. For example, private equity firms can generate revenues through initial public offerings.

Investors

Typical asset management firms are open to most investors. They may accept funds from individual, retail, institutional and other investors. While it can increase their number of customers, it may also limit their funds. 

Private equity firms, in contrast, are more specific in choosing their investors. Usually, these firms are only open to institutional and accredited investors. They may have lesser investors, but they also can receive more funds.

Strategies

The strategies used by asset management and private equity firms also differ. Most typical asset management firms focus on reducing risks and increasing portfolios. While the latter is also a focus area for private equity firms, they are not particular about investment risks. Private equity firms also focus on a specific investment class. Therefore, they may increase portfolio risks due to the loss of diversity.

Conclusion

Asset management firms collect funds from various investors and invest them in a specific area. These firms may come in several structures and forms. 

Usually, these structures also define the underlying firm. One such form of asset management company includes private equity firms. While they are the same, they may also have some differences.

This post on TessMore Finance: Asset Management Firm Vs. Private Equity Firm: What is the Difference? was also published on CFAJournal.

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