Difference Between Private Equity and Asset Management Explained

Investors usually look for public securities and assets that can generate good returns. They identify the market and then invest in various asset classes.

However, some investors need more knowledge and time to make crucial investment decisions. They may need more time to manage their investment portfolio and take control of their investments. But they still have to indulge in the investment process.

These investors usually rely on different firms, such as asset management and private equity, to receive professional services. But before choosing the right firm for their investment, investors need to know the difference between private equity and asset management.

In finance, asset management is multiplying total wealth over time through managing, acquiring, and trading investments that can grow in value. 

Several asset management companies and professionals offer this service to individuals and organisations to manage their investment portfolios, maximising their value while mitigating risks.

A private equity firm invests capital or money in risky, financially struggling companies to gain ownership interests. The firm's goal is to assist the management in improving its capital structures and eventually reselling them to gain a significant profit.

These private equity firms usually partner with entrepreneurs who need more skills and resources but possess great business growth ideas. Thus, in exchange for an ownership stake, these firms provide managerial expertise and financial backup to the financially struggling companies in which they invest.

An asset management company successfully serves an organisation's and high-net-worth individuals' investment needs by depositing their money into money market funds to generate higher returns.

Their working process involves the following steps:

Step 1: Identify and Evaluate the Assets

Before managing the assets, an asset manager should primarily identify the types of assets available and what should be done with them.

After identifying assets, they will evaluate each one by analysing financial statements and other relevant information, which will help determine their actual value.

Step 2: Classify and Select the Assets

After doing so, the assets should be classified according to their return potential, liquidity, and level of risk involved. This classification will allow the asset manager to access the best investment strategy for each asset.

The asset manager will now consider the investor's risk tolerance, time horizon, and objectives. Based on these factors, they will choose the most appropriate asset for the client’s investment portfolio.

Step 3: Asset Maintenance

After selecting assets, the asset manager monitors and evaluates their performance regularly. They also evaluate the assets' depreciation rates, overall impact, and potential risks associated with each.

This will help them assess whether the assets are performing as expected. Thus, they can make the necessary adjustments as and when required.

Step 4: Predict the Asset Value

Many investors prefer private equity firms because they implement various investment strategies, such as venture capital and leveraged buyouts, to achieve their goals. However, these firms offer a limited range of investment options.

These firms invest in private businesses by raising money from different institutional investors, such as sovereign wealth funds, pension funds, insurance companies, etc. They do so to resell them after some years to generate better returns than one can generate from investing in public markets.

Between private equity and asset management, the former is well suited for businesses that possess undervalued stocks and need restructuring. It is also a viable option for companies that want to acquire other businesses, accelerate their growth, expand into a new market, or need some restructuring and tweaking.

However, asset management is the most convenient option for those individuals, government organisations, and businesses that tend to invest in certain projects but fail to meet their long-term goals through traditional options like bank loans, etc.

Both private equity and asset management are considered smart investment options for growing a client's financial portfolio. However, which option will be suitable depends upon your financial goals. You can seek the assistance of a qualified and experienced financial professional to determine which option will be best for your requirements.