Table Of Content
What Is Private Equity & How Does It Work?
Private equity (PE) refers to investments made in private companies—those not listed on public stock exchanges.
These investments are typically made by private equity firms, accredited investors, or institutional funds aiming to generate high returns over the long term.
Here's how it works:
Capital is pooled from investors into a private equity fund, often structured as a limited partnership.
PE firms acquire or invest in private businesses with growth potential, operational inefficiencies, or turnaround opportunities.
Value is created through strategies like restructuring, cost-cutting, or expansion.
Profits are realized when the firm exits—via IPO, sale, or merger—returning gains to investors.
Because private equity is less liquid and typically has long holding periods (5–10 years), it’s better suited for long-term investors seeking diversification and potentially outsized returns.
Ways to Invest in Private Equity as an Individual
Individuals can access private equity through direct PE funds, publicly traded PE firms or ETFs, and online platforms for startup or real estate investing—each offering unique benefits and risks:
1. Private Equity Funds (Direct or via Platforms)
Individuals can invest directly into PE funds or use online platforms like Fundrise or Yieldstreet. These platforms offer access to curated private equity deals or diversified PE portfolios.
To qualify for many direct investments, you need to be an accredited investor. However, some platforms offer lower minimums and semi-liquid options.
For example, an investor with $5,000 might buy into a Fundrise private equity real estate fund targeting apartment developments. Over time, they receive quarterly distributions and equity appreciation.
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Examples of Private Equity Funds
Platform | Minimum Investment | Accreditation Required | Investment Types |
|---|---|---|---|
Yieldstreet | $10,000 (varies by deal) | Yes (for most offerings) | Real estate, legal finance, PE funds |
Fundrise | $10 (Starter); $1,000+ (Core plans) | No | Real estate, private equity funds |
EquityMultiple | $5,000 | Yes | Real estate equity & debt |
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Pros & Cons For Investors
Pros | Cons |
|---|---|
Access to institutional-quality deals | High fees and management costs |
Professional fund management | Long holding periods (often 5–10 years) |
Diversification across industries | May require accreditation or high minimums |
2. Private Equity ETFs and Publicly-Traded Firms
Another option is investing in publicly traded PE firms (e.g., Blackstone, KKR) or ETFs that track private equity indexes.
These are listed on major stock exchanges and can be bought via any brokerage account, making them a practical entry point for retail investors.
For example, an investor might buy shares of the Invesco Global Listed Private Equity ETF (PSP), gaining indirect exposure to dozens of PE companies around the world.
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Examples of Publicly Traded PE Firms and Their Focus
Firm Name | Ticker Symbol | Focus Area | Notable Investments |
|---|---|---|---|
Blackstone Group | BX | Real estate, private equity | Hilton, Bumble |
KKR & Co. | KKR | Infrastructure, buyouts | Epic Games, GoDaddy |
Carlyle Group | CG | Aerospace, energy, health | Hertz, Booz Allen Hamilton |
Apollo Global | APO | Credit, PE, insurance | ADT, Shutterfly |
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Pros & Cons For Investors
Pros | Cons |
|---|---|
Easy to buy/sell through a brokerage | Indirect exposure to PE assets |
Lower fees than direct PE funds | Market volatility affects performance |
No accreditation required | Limited upside compared to true PE deals |
3. Angel Investing or Venture Capital via Online Platforms
In early-stage investing, individuals can use platforms like SeedInvest or Republic to back startups.
While technically closer to venture capital, this still falls under the private equity umbrella. Investors browse startup pitches, review terms, and fund directly in exchange for equity.
For example, you might invest $1,000 in a fintech startup on Republic and receive quarterly updates. If the company gets acquired, you share in the upside.
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Pros & Cons For Investors
Pros | Cons |
|---|---|
Low minimums (as little as $100) | Very high risk, potential total loss |
Access to early-stage innovation | Illiquid—returns take years to realize |
Great for portfolio diversification | Requires due diligence and research |
Which Is Best For My Needs?
The best way to invest in private equity depends on your risk tolerance, investment timeline, liquidity needs, and accreditation status.
Investment Type | Minimum Investment | Liquidity | Access Level | Risk Level |
|---|---|---|---|---|
Direct PE Fund | $100,000+ | Locked (5–10 yrs) | Accredited Investors | High |
Online PE Platforms | $5,000–$25,000 | Semi-liquid | Open to Individuals | Medium |
PE ETFs/Public Firms | No minimum | Highly Liquid | Public Market Access | Medium |
Crowdfunding Startups | $100+ | Illiquid | Open to Individuals | Very High |
If you're a long-term investor with substantial capital and can meet accreditation requirements, direct private equity funds offer higher return potential but require patience and due diligence.
However, if you prefer flexibility and easy access, investing in publicly traded PE firms or ETFs may be better, as they offer daily liquidity and no accreditation barriers.
Investment Type | Management Fee | Performance Fee (Carry) | Additional Fees |
|---|---|---|---|
Traditional PE Fund | 2% annually | 20% of profits | Admin, legal, audit |
PE via Platforms | 1–2% | 5–20% | Platform fees |
PE ETFs | 0.5–1.5% | None | Fund expense ratio |
Crowdfunding Deals | Variable | 0–10% | Deal closing fees |
For those with smaller budgets or looking to support innovation, crowdfunding platforms like SeedInvest or Republic allow you to back startups with as little as $100, though these carry higher risk and are less liquid.
Therefore, align your choice with your goals—whether it’s building long-term wealth, diversifying your portfolio, or participating in early-stage growth.
Also, consider diversifying across multiple PE channels to balance risk and opportunity.
Pros & Cons of Private Equity Investing
Private equity offers strong potential returns, but it also comes with risks and constraints. Here's a balanced look at the pros and cons for investors.
- Higher Return Potential
Private equity investments often aim for outsized returns compared to public markets because they target high-growth or undervalued private companies.
- Portfolio Diversification
Because private equity has a low correlation to public markets, it can reduce portfolio volatility and enhance long-term performance.
- Access to Innovative Companies
Investors can gain early exposure to startups or growth-stage firms not available on public exchanges, which may lead to big payoffs.
- Active Value Creation
PE firms actively work to improve operations and financials, which can create significant value over time and benefit investors.
- Illiquidity and Long Holding Periods
Investments are typically locked in for 5–10 years, which makes private equity less suitable for investors needing quick access to cash.
- High Minimums and Fees
Many PE funds require significant capital and charge layered fees, which can eat into returns—especially in underperforming years.
- Accreditation Requirements
Direct investment often requires accreditation, limiting access for average retail investors unless they use platforms or ETFs.
- Higher Risk of Loss
If a private company fails or underperforms, the investment can be severely impaired or lost entirely.
Due Diligence Tips Before Investing in Private Equity
Before allocating capital to any private equity investment, it's essential to conduct proper due diligence. This helps reduce risks and improve potential returns.
Research the Fund Manager’s Track Record: Evaluate the firm’s previous funds, exits, and performance history. A strong, transparent track record can indicate future reliability.
Understand the Investment Strategy: Is the fund focused on buyouts, growth equity, or distressed assets? You need to know where your money is going and why.
Review Fees and Liquidity Terms: Examine the fee structure (management and performance) and lock-up period. For example, a 2% management fee plus 20% carried interest is standard but costly over time.
Assess the Portfolio Companies: If available, analyze the industries and companies the fund targets. For example, investing in early-stage tech carries more risk than mature manufacturing firms.
Confirm Regulatory Compliance and Legal Structure: Ensure the fund follows SEC rules and is properly structured (typically as a limited partnership). This protects your rights as an investor.
FAQ
Venture capital is a subset of private equity that focuses on early-stage startups, while private equity typically invests in more mature companies. Both aim for high returns but at different business stages.
Yes, self-directed IRAs or solo 401(k)s allow investments in private equity. You must work with a custodian that supports alternative investments and follow IRS rules.
Returns are often taxed as long-term capital gains, but carried interest and fund structures can complicate tax treatment. Always consult a tax advisor for specific situations.
Yes, some platforms like Fundrise or Republic offer private equity-like investments with lower barriers. These are designed to be more accessible to everyday investors.
These markets allow investors to buy or sell stakes in existing private equity funds. It offers more liquidity but can come with pricing discounts or fewer choices.
Firms earn through management fees and carried interest. They also profit from successfully exiting investments through IPOs or company sales.
Private equity firms often target sectors with strong cash flows or growth potential like healthcare, technology, and consumer goods. However, focus varies by fund strategy.
Private equity investments are typically locked for several years, often five to ten, depending on the fund’s structure and investment timeline.
Private equity isn’t immune to downturns but may be less volatile than public markets. However, illiquidity and leverage can magnify risks in tough times.
Carried interest is the share of profits (usually around 20%) that fund managers earn if returns exceed a minimum threshold. It aligns their success with investors'.
Most robo-advisors do not offer direct private equity exposure, but some may allocate to alternative asset funds or ETFs with indirect exposure.
