How to Invest in Private Equity (PE)

If you’re like most investors, you probably keep an eye out for unique investments. Private equity checks that box and lets you diversify away from the usual assets. However, it’s important to consider the risks and ramifications. 

Here’s the lowdown on private equity — including how to start investing. 

What is private equity?

“Private equity” refers to ownership in companies and assets that don’t trade publicly. The field is dominated by specialty firms and funds that either:

• Buy private companies; and/or
• Buy public companies and de-list them from stock exchanges

Private equity firms often spend 10-12 years making these companies profitable. (Or more profitable.) Then, they sell them or take them public again to generate returns. 

With rare exceptions, private equity investing requires three parties:

1. Private equity investors: Individuals or institutional investors who fund the investment. 
2. Private equity firms: Specialty firms that manage and invest the money, usually through a private equity fund. 
3. Portfolio company: The company or companies that the firm or fund invests in. 

Benefits of investing in private equity

Private equity investments may have several benefits not found in regular stocks. 

Because these companies don’t answer to public shareholders, their value doesn’t necessarily move by the minute along with stock market whims. The long-term focus gives these investments time to grow. They also have more flexibility, as they are somewhat less regulated. 

As a result, private market returns have consistently outpaced public market returns since 2002.  

While not risk-free, private equity investments CAN limit risk in one important way. Since investors are usually designated “limited partners,” they have limited liability. In other words, they can’t lose more than they invest — even if the acquired business fails.  

Drawbacks and risks of investing in private equity

Private equity investments offer great promise. However, they’re also incredibly risky, especially for beginner investors. Below, we’ll explore some of the most important risks. 

High-reward = high-risk 

Private equity boasts great returns — but at great risk. 

For one, many PE investments fail to achieve their promised returns, if they profit at all. The long time horizons also tie up investor dollars for several years. Plus, unforeseen economic events like interest rate changes or recessions can impact returns. 

Very low liquidity 

Private equity investments tend to be very illiquid, especially in their early years. “Illiquid” means that investors can’t easily sell their investments. Most private equity firms aim to stay invested for at least 10 years. Many also “lock up” investor funds for at least 5-7 years before they can withdraw their funds. 

Transparency concerns

Private companies don’t have to follow the same SEC regulations as public companies. As such, private investors don’t have access to the same information as public investors. 

Additionally, private equity firms aren’t required to disclose any conflicts of interest that arise from, for example, acquiring or advising competing businesses. (In 2024, a U.S. Court of Appeals struck down a new SEC rule that would have required increased transparency and accountability for private investments.)  

High minimum investments and fees

Private equity firms usually set investment minimums in the million-dollar range. They often set fee structures similar to that of hedge funds, with an annual management fee around 2%. If the asset sells at a profit, they typically take 20% off the top. 

Economic impacts of private equity

Many critics argue that PE investing impacts the economy and investors in negative ways. Because these firms “flip” businesses, they may engage in extreme cost-cutting measures like:

• Layoffs
• Reduced worker benefits
• And operational or product changes 

Many firms also use “leveraged buyouts” to acquire assets. (More on these below.) This strategy saddles the acquired company with debt that can cause future bankruptcies. 

Private equity firms have even been blamed for worse patient outcomes and higher bills at acquired hospitals. 

Eligibility criteria for investors

One unusual aspect of private equity is that not everyone is eligible to buy in.  

Typically, private equity firms limit their eligibility to three groups:

• Institutional investors: This group includes insurance companies, pension funds, and university endowments
• Accredited high-net-worth investors: Individuals or couples with either
  • A net worth over $1 million (excluding their primary home); or
  • An annual income of $200,000 (individuals) or $300,000 (couples) for at least two years
• Accredited investors who:
  • Have certain high-level financial certifications
  • Are knowledgeable fund employees 

Ways to invest in private equity

Most of the investments below are designed for accredited or institutional investors. However, smaller players can still get in on the action. 

Direct investments in private companies

The most straightforward way to get involved is by buying private shares. Typically, private companies only sell shares to accredited investors. However, non-accredited investors can invest through angel investing, which involves funding startups. Some private companies also offer stock to employees. 

Private equity funds

Private equity firms usually establish funds to manage acquired businesses. These funds pool capital to invest in or buy existing companies. They then increase value by advising, managing, or restructuring the businesses. Changes may include layoffs, new management teams, and/or technological upgrades. 

Buying private equity firm public shares

Today, investors can buy publicly traded shares of private equity firms. Examples include Blackstone, the Carlyle Group, and Apollo Global Management. 

ETFs and mutual funds 

Generally, mutual funds and ETFs can’t own private equity due to SEC transparency rules. But they can get around these rules by investing in:

• Publicly listed shares of private equity firms
• Companies that invest in private equity firms
• Public companies acquired by private equity firms 

Many of these funds are considered “funds of funds.” That means they’re funds that invest in other funds that own or manage private equity.  

Secondary markets for private equity

Sometimes, PE investors sell their investments to other investors instead of waiting for their money to “unlock.” This happens in the secondary private equity market. 

Crowdfunding platforms

Crowdfunding provides everyday investors with an easier way to access private equity. Investors can use these platforms to invest in startups and young businesses. However, the SEC limits how many non-accredited investors can buy into each opportunity. Examples of crowdfunding private equity platforms include AngelList, SeedInvest, and Crowdfunder.   

Understanding private equity acquisitions

Private equity often involves a firm or fund buying a private business to increase its value and sell it later. In some cases, the business continues running as usual. In others, the investor(s) may overhaul operations to increase its profitability. 

Firms invest in these assets through several strategies and mechanisms, including: 

Growth capital investments

Growth capital investments are existing companies that already have or likely will achieve profitability. Investors buy minority ownership stakes, usually as preferred shares. This strategy limits their responsibilities and risks. 

Buyouts 

In a buyout, private equity funds typically buy a company outright. (They might also take a “controlling interest” in the company.) 

Sometimes, the company is already private. In other cases, the acquired company is a publicly traded company that the fund plans to de-list. Most of the time, these are underperforming companies that the fund believes it can turn around.  

Buyout strategies may take the form of:

• Carve-outs: The fund buys part of a larger company. 
• Secondary buyouts: The fund buys a company from another private equity group. 
• Leveraged buyouts: The fund mixes investor capital and loans to invest in or buy the company. This risky strategy uses the company’s assets as collateral for the loan. The company also becomes responsible for the debt. In some cases, the acquired company can’t afford the debt and has to file for bankruptcy. 

Venture capital

Some PE investors specialize in venture capital, or funding startups with solid growth potential. Venture capital funds usually let the company retain its management teams. Sometimes, they offer technical or managerial expertise in addition to cash investments. 

Distressed investments

Some funds buy “distressed investments.” These are companies headed toward or currently in financial crisis. This includes companies undergoing restructuring or filing for bankruptcy. These incredibly high-risk opportunities require lots of risk and time to turn around. 

Steps to start investing in private equity

Many investors can’t or won’t invest in private equity directly. But if you decide to get involved, it’s smart to go in with a plan.  

Evaluate your financial situation and risk tolerance

Private equity investments require investors to ask some difficult questions, like:

• Can you afford the investment minimums?
• Can you afford to tie your money up for 5-12 years before seeing a profit?
• Can you financially and emotionally absorb potential losses?

Set clear investment goals

Once you’ve established your ability to invest, start setting some goals. Do you want shorter-term profits or longer-term profits? How much do you want to invest? How close are you to retirement, and will this investment impact your plans? 

Become an accredited investor (if needed)

Not all private equity investments require you to be accredited (but most do). Becoming accredited doesn’t involve taking a test or getting a fancy certification. You just need to have the income, net worth, or other requirements to pass the investment firm’s background check. (Plus the minimum investment amount ready to go.) 

Conduct thorough due diligence

Before making any investment, conduct your due diligence. 

Interview potential private equity firms, if possible. Ask about fees, investment minimums, past investments, risks, and potential outcomes. Know the desired strategy and what you’ll do if the investment deviates from this strategy.

If you’re crowdfunding, ask about the product, business plan, and key competitors. 

In short: Get informed — and stay informed as long as you’re invested. 

Tracking your private equity investments

If you have the desire and cash to invest in private equity, it’s a good idea to hire a financial advisor to help. You can even track your private equity investments along with the rest of your portfolio, but you’ll need the right tools. 

Enter Quicken. 

Quicken lets you manage all your money — including your spending, savings, debt, retirement funds, brokerage accounts, and private equity investments — all in one place.

FAQs about private equity investing

What is the typical investment horizon for private equity?

Most private equity funds set time horizons of 10-12 years. Other assets, like crowdfunding and venture capital, may have looser timelines. Mutual funds and ETFs generally offer the most flexibility. 

Is investing in private equity suitable for everyone?

Private equity investing bears unique risks and often high investment minimums. Generally, PE assets are best suited to investors with the pockets or know-how to engage at an advanced level. 

Can I access private equity through my retirement accounts?

Many pension plans and insurance policies invest in PE firms. In this way, many investors invest in private equity without knowing it. However, traditional retirement accounts may not let you invest in PE due to the increased risk.