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Differences of Asset Management vs. Private Equity

By SmartAsset Team,

1 day ago

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Asset management and private equity are two strategies that investors can use to grow their wealth. Asset management is the practice of overseeing various investments, such as stocks, bonds and real estate. You can perform asset management on your own or with the assistance of a professional. Private equity refers to investing in a specific type of asset, namely, private companies. Both strategies can have a role in your investment portfolio.

If you need help with asset management, a financial advisor can help you put together a plan focused on meeting your goals.

What Is Asset Management?

Asset management consists of buying, selling and otherwise presiding over a portfolio of investments such as stocks, bonds, real estate and mutual funds. An individual who puts together their own portfolio is engaging in asset management. So is a financial professional who manages investments on behalf of clients or an employer.

Whether do-it-yourself or provided as a professional service, the primary goal of asset management is similar. The broad objective typically is building a diversified portfolio that balances risk and reward according to an investor's risk tolerance, time horizon and financial plan.

One example of asset management is a mutual fund. An asset management company pools funds from multiple investors to build a diversified portfolio of securities. These serve as the fund's assets. Financial professionals will then make decisions and take actions to buy and sell assets to optimize the fund’s performance.

What Is Private Equity?

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Private equity is a specific investment strategy that usually involves purchasing an ownership stake in a private company. It can also refer to taking a public company private. Private equity firms typically raise capital from institutional investors , accredited investors or high-net-worth individuals . They use those funds to acquire a stake in a company or sometimes buy it outright.

From there, the private equity firm takes an active role in managing and transforming the company. The goal of a private equity strategy is often to eventually sell the company at a profit and move on to a new opportunity.

Private equity funds can use a variety of different strategies depending on the risk level of an opportunity, investment horizon and factors. These may include:

Leveraged buyouts (LBOs): A firm uses borrowed money to purchase a controlling interest in a company. The goal is to restructure the company and improve its financial performance, then sell it at a higher valuation. LBOs may involve taking public companies private and reducing costs to increase profitability.
Venture capital: Venture capital firms provide funding to early-stage companies in exchange for equity and often take an active role in its development. These investments are typically higher risk, but offer the potential for substantial returns.
Growth capital: Growth capital is provided to more mature companies that are looking to expand or restructure operations, enter new markets or finance acquisitions without changing control of the business. These investments are generally less risky than venture capital, but still offer considerable growth potential.
Distressed or special situations: Private equity firms may also invest in distressed companies that are struggling financially or are on the brink of bankruptcy. These high-risk investments can yield high returns if the firm can turn the company around by restructuring debt, changing management or selling off non-core assets.
Mezzanine financing: This is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default. Mezzanine financing is often used by companies that are looking to finance an expansion, but don't want to dilute existing equity holders.

Asset Management vs. Private Equity

Asset management and private equity both aim to grow wealth. But each has its own strategies and traits such as barriers to entry that cause it to appeal to specific types of investors. Here is a comparison of their key characteristics:

	Asset Management	Private Equity
Investment Approach	Involves managing a diversified portfolio of assets such as stocks, bonds and real estate, aiming for steady, reliable returns over time. Asset managers or investors typically focus on balancing risk and reward based on investment goals and risk tolerance.	Focuses on acquiring private companies or taking public companies private, with a hands-on approach to restructuring or improving the business. The goal is to increase the company’s value and sell at a profit.
Risk Level	Generally carries a moderate level of risk, as investments are spread across various asset classes to minimize exposure to any single market or security. The focus is on long-term growth with a controlled level of risk.	Typically involves higher risk, as investments are concentrated in specific companies that may require significant changes to achieve profitability. The success of private equity investments often depends on the firm’s ability to enhance the value of the acquired company, which can be uncertain.
Liquidity	Generally more liquid, as securities can be bought and sold easily on public markets. This provides investors with flexibility and the ability to access funds as needed.	Much less liquid, often requiring investors to commit their capital for several years before seeing a return. The lack of liquidity reflects the long-term nature and higher risk associated with these investments.
Potential Returns	Seeks consistent, moderate returns over time. The focus is on growth and long-term wealth preservation.	Seeks higher returns by taking on more risk and engaging in the active management of companies. While the potential for significant gains is greater, so is the possibility of losses if the investment does not perform as expected.
Accessibility	Generally more accessible to a wide range of investors. Investors can start with relatively modest amounts of capital.	Often only available to institutional investors or accredited individuals who meet specific capital and expertise criteria. The higher barriers to entry make private equity less accessible to the average investor.

Bottom Line

Asset management describes a broad-based investment activity including many types of assets, while private equity is focused on ownership of private businesses. Asset management may be more diversified and conservative and seek steady if moderate growth, while private equity provides opportunities for higher returns through hands-on investment in private companies.

Investment Planning Tips

A financial advisor can help you analyze and manage investments for your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
Asset allocation is a central component of portfolio management that may be done differently according to the age of the investor. SmartAsset's guide to asset allocation for any age shows how it's done.

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