What is an Investment Partnership?
Investment partnership refers to any form of business ownership wherein there would be at least 90% of all of its investments that are held in financial instruments like bonds, stocks futures and options and the predominant income that is derived (usually>90%) would go on to have such financial assets as the source.
Examples of Investment Partnerships
Given below are some of the examples-
- Hedge FundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.
- Mutual FundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.
- Private Equity
- Venture Capitalists
- Portfolio Management Services
Advantages of Investment Partnerships
- Magnified Returns – Such kinds of business usually fall under the category of alternative investment funds. They invest in risky securities wherein there is scope for a higher return potential as well. Hence there is a high probability of higher returns by investing in such investment partnerships
- Less Regulation – For alternate investment fund categories like hedge funds, the regulation is also limited and the funds are at their own discretion with regard to the way they manage their investments. Hence they are free to adopt their style of strategy to give maximum and optimum returns to the investors. There would not be much interference of any sort
- Contribution to Growth – Such kind of investment partnerships provide the necessary growth capital for a company that seeks to raise funds. Companies that seek to raise funds from institutional investors, this route will be a viable option as the companies can fulfill the criteria required for certain holdings in the company in the form of institutional investors when it first seeks an IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.. Moreover, some companies may avoid the route of raising money through public issuer because of various regulations and formalities involved. In such cases, they adopt the route of securing funding from hedge funds through a common procedure known as a private placementPrivate PlacementPrivate placement of shares refers to the sale of shares of the company to the investors and institutions selected by the company, which generally includes banks, mutual fund companies, wealthy individual investors, insurance companies..
- Provides Seed and Angel Capital – Such a form of investment partnerships goes on to invest in amateur companies that are just starting up and thus help the companies secure their growth funding. Usually, venture capital firms go on to buy a stake in such companies and then make the suitable exit after the company goes on to make sufficient growth in a time frame of 5-10 years
- Ability to Gain Access to Complex Products – By having to invest in an investment partnership, a retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making. can gain access by having exposure to complicated products that hedge funds invest in such as exotic derivatives like credit default swaps etc. The retail investors in their normal course would not have access to such products. It is only through investing money in such partnerships, they gain access to markets for such products.
- Outsourcing Management of Money in Professional Hands – By having to provide money to such funds, the investors would now outsource the money management to professional money managers and thus the retail investor is freed from worrying which stock to buy or sell, which markets to monitor for opportunities and so on. He/she is well assured that their money is being managed by professionals now.
Disadvantages of Investment Partnerships
- No Transparency- More often than not, information about the investment partnerships is not known especially when it comes to financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.. The investors though sophisticated may not have enough knowledge and whereabouts as to how exactly the money is managed and where it is invested on a day to day basis, which is usually the case for hedge funds. Moreover, they are not obliged to declare publicly their performance and returns achieved overtime or year on year. Hence what lacks, in this case, is transparency for the public with regard to how exactly their money is being managed by the investment partnerships
- Competition for the Survival of the Best – When it comes to money, it is a natural tendency to look for the best, with regards to who gives the best returns. Hence there is constant check kept on who performs the best in a year based on historical returns. Hence investors would tend to flock towards such funds that give them the best returns for the money. Financial media always highlights the performances and returns generated. In such scenarios, the funds that do not perform to the level of the benchmark do get pushed out and investors may start redeeming and then pumping their money in funds that perform better.
- Small Mistake Wipes Out Everything – There have been instances where the top performer is not in the top charts for the upcoming year. More often than not it is even noticed that the top hedge funds do liquidate after a certain period of time. A wrong strategy or wrong move into the wrong stock may wipe out wealth that was created over the years and investors will begin to redeem. Even when it comes to private equity and venture capital, if they invest in companies that are currently not performing well like they once were, their valuation too will be downgraded. This impacts the returns of PE and VC funds.
Hedge funds and venture capital firms usually seek funding only from accredited and sophisticated investors and small retail investors may not be able to invest in them.
- Investment partnerships tend to provide the necessary growth funding to the ventures that need it, apart from helping investors get amazing returns on the investments they have made. These partnerships no doubt facilitate greater efficiency in the financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces. by taking unconventional positions in the market such as short positions.
- They also invest in exotic products which the layman investor won’t have much information on. However, the lack of transparency in such investment partnerships will keep investors in the dark especially with regard to the financials of the company.
- Further, the heavy competition will push out the weakling as investors seek to redeem from such loss-making investment firms. However, there have been investment partnerships that have gone to build enormous wealth for the investors and the community as a whole.
This has been a guide to What is an Investment Partnership & its definition. Here we discuss the investment partnership example along with advantages and disadvantages. You can learn more about from the following articles –