Summary
- Investing in private equity provides access to a greater number of high-growth, high-return opportunities not available through traditional avenues.
- Private equity investments typically require millions of dollars, but there may be options for investing in the $5,000 range.
- Limitations of private equity investments include a long-term investment of 10 years or more, low transparency, and high risk.
- The main ways to invest in private equity include direct investments, secondary market investments, private equity funds, and publicly traded private equity funds.
- Unbiased can connect you with an advisor to help guide your investing decisions, including more complex investments like private equity.
What is private equity?
Private equity (PE) is a pooled investment in privately held companies. These companies haven’t been listed on a public stock exchange and may have strong growth potential. However, the barrier to entry is high, and the investment horizon is often 10 years or more.
The main branches of private equity include:
- Venture capital: Investments focused on early-stage companies with high-growth potential.
- Buyouts: Investors inject capital into an established company, take control, restructure, and improve performance.
- Growth equity: When mature companies need capital to grow, they could seek investment from private equity.
Private equity investments have historically outperformed traditional market investments, but recent numbers show modest returns. A backlog of PE-owned companies without exits could also account for lower returns that’ll eventually pan out.
Ways to invest in private equity
Private equity investments can limit certain investors, but there are more options than you may realize. We’ll describe each of the following options in the sections below.
- Direct investment in a private equity firm
- Private equity secondary funds
- Funds of private equity funds
- Publicly traded private equity firms
How to invest in a private equity funds
The traditional route involves a direct investment in a private equity firm where your money is pooled with other investors into a fund. The funds are used when capital is required to enter new deals (also called a drawdown). Investors receive distributions when the fund exits investments.
Because of the nature of private equity investments, your money is typically locked up for years. It’s also considered high risk. When the fund isn’t successful, you could lose all your money.
How to invest in private equity secondaries
Private equity investments are accessible on the secondary market. Called secondaries, a second investor buys the assets or interests from the primary investor of a private equity fund, essentially replacing the primary investor with themselves.
The primary investor can achieve greater liquidity and portfolio rebalancing by selling off assets to a secondary investor, while a secondary investor gains immediate exposure to a mature portfolio of private equity investments. Broker-dealers can help facilitate these types of transactions.
How to invest in funds of private equities
A private equity fund-of-funds (FOFs) invests in multiple PE funds and managers, granting broad access to around 20 funds and 400 companies. This diversification helps protect the downside, but does require a higher investment.
How to invest in publicly traded private equity firms
Publicly traded entities can provide partial exposure to private equity funds. These may include business development companies, private equity firms’ stock, and listed private equity funds. To invest, you can buy shares through a brokerage account.
How much do you need to invest in private equity?
Investing in private equity requires a substantial amount of resources. Because of the amount of risk you’re taking, you should be prepared for losses, possibly even your total investment.
Some smaller funds may have minimum investments of $5,000, but it’s more typical to see requirements of $250,000 to $25 million.
What are the pros and cons of investing in private equity?
Investing in private equity comes with some pros and cons to consider.
Pros
- High returns possible: Private equity offers the potential for strong returns. Historically, private equity funds have outperformed public equity funds.
- More opportunity: Private equity offers opportunities not available in public markets.
- Diversification: Private equity doesn’t always move in tandem with the market, providing diversification in your portfolio.
- Value creation: Private equity firms often create value by actively improving the performance of the companies they invest in.
Cons
- Long-term investment: Money is locked up for 10 years or longer.
- Higher risk: Private equity funds are not required to be registered with the SEC and don’t have disclosure requirements, which makes them higher risk.
- Not accessible to every investor: Private equity is hard to access. Investing in a fund is limited to accredited investors and qualified clients.
- Cost: Private equity fund managers are paid a share of profits in addition to a management fee.
- Limited transparency: Private equity funds don’t need to disclose withholdings, which means you may not know the details of your investment.
Is it worth investing in private equity?
Private equity touts its high returns, but these returns aren’t guaranteed, and it’ll take a decade to earn your money back. It’s worth assessing your needs and goals and balancing those against the tradeoffs of investing in private equity.
Private equity is best for investors who:
- Have a high tolerance for risk.
- Have a high net worth and a large amount of investable assets.
- Do not need the money in the near future.
- Want to diversify their investment strategy away from public equities.
Private equity may not be for investors who:
- Can’t afford the risk.
- Don’t have as much to invest.
- Will need the money in the near future.
- Haven’t maxed out other traditional investments.
The bottom line
Any investment should consider your individual circumstances, goals, and financial plan. Whether private equity fits into that equation is a question that deserves some expertise. Unbiased can connect you to a financial advisor to answer all your questions about investments, including private equity.
Get in contact with a financial advisor through Unbiased today.