Private equity can play an important role in an investment portfolio. As a general rule, it shouldn’t be your whole portfolio, but private equity funds and direct private company investments can add the potential for outsized returns and diversification—though at the cost of illiquidity and potentially higher risk in certain circumstances.

Broadly speaking, private equity investing can take many forms including venture capital and private equity (“buyout”) funds, or private companies of different stages and sizes.

In some ways, investing in private equity is similar to real estate investing. Both are typically direct bilateral transactions without a public quoted price. Both are illiquid (i.e. you can’t just sell them like a share on an exchange), but both give you a return profile that’s uncorrelated to public markets.

The risks in private equity are higher, and the returns can be higher. There’s also a mortgage market that lets you leverage your capital when it comes to real estate. In venture capital and seed investing, there’s little leverage available, while in more mature companies there’s often leverage on the business or businesses that a private equity fund would own.

Still, both real estate and private equity share at least one advantage. They let you get closer to the thing you’re invested in, depending on how you do it. But before we get into the how, let’s take a step back and look at private equity investing as a whole — what it is, how it works, and how you can get into it.

What is private equity investment?

Private equity investment is really two different buckets of investing. In one bucket you have private equity funds, and in the other you have private direct investment. Either way, these opportunities usually come to you through relationships.

Often financial advisors, particularly associated with larger financial institutions, will have access to private equity. They might create a feeder-type entity so individuals can invest in relatively small quantities into funds that typically cater to institutional investors. Or maybe you’re a qualified investor, you know someone who’s putting something like that together, and you want to be a part of it.

Private direct investment also happens through relationships, just in a different way. Maybe someone you know is starting a company and you want to provide seed money (that first capital that gets something off the ground). You invest in the company, whatever it is, and you get some level of equity.

No matter which form private equity investment takes, you’re going to want to keep track of your assets in terms of both net asset value (or NAV) and your cash flows.

Finding opportunities for private equity investment

If you already have a 401k, maybe a private brokerage account and some real estate, and you’re looking to branch out into direct investments, the best way to do that depends on how much time you have.

There are startup companies, for example. A handful of folks have an idea and they raise a little money or use their own money to sketch that idea out.

These aren’t publicly traded securities. They’re private, closely held opportunities, and the way you get access to invest in those is typically because you know one of the founders. Someone comes to you and says, “I want to start a bookseller site and I need $500,000 in capital. I’m going to put up $200,000, and I’m going to go to my buddies and they can each put in $25,000.”

But there are other opportunities that are more intentional. Local angel groups might pool their funds and invest locally. They’ll get together and hear pitches, investing a bit in several different things to create a small portfolio.

If you want to get into direct investment, it usually isn’t something you’re doing on a one-off basis. You’re building a portfolio of 5 or 10 opportunities. Maybe more.

You’re also going to reserve additional capital because they’re going to need more as they grow, and you want to be there to back up your investment. Plus, you need to be able to weather the illiquidity because it could be several years or more before that money comes back on return.

That’s why the portfolio approach is so important — early-stage investments are the most high risk and least liquid but often have the highest return profile.

Valuing your private equity investments for tracking purposes

One of the interesting things about private equity investments is that you can’t just track the market when it comes to tracking their value. For publicly held stocks, for example, you can push that button in Quicken and see all your values move around.

With private equity investment, you can’t do that, and that can be a really good thing. It keeps you closer to those investments. You have to be a little more involved with them — not in terms of managing the companies, of course, but in terms of tracking their NAV.

If you’re invested in a private equity fund, that fund will send a NAV every quarter, half-year, or year.

For direct investments, you won’t get a NAV report, so figuring out the value of that investment is more anecdotal. For example, if you invested in a business that had a large up-round — a significant increase in value led by a large institutional investor — you might write that up. But it’s a high bar.

What’s the best way to track private equity investments?

If you’re in Quicken, your cash flows will populate in your automatic feeds — things like sending a check for a capital call, sending out a wire, or receiving money in.

To attribute those cash flows to an investment, you’ll have to create an entity and manage it line by line. People do that in different ways and to different degrees of sophistication, but at a minimum, you want to get a sense of how the cash flows are moving.

Here’s how to track private equity investments in Quicken

  1. Create a private equity account with a zero asset value. Remember to make it a manual account. It’s a private investment, so there won’t be any automatic downloads to or from it directly. You’ll have to update the account yourself.
  2. Transfer your initial capital call to the private equity account. Typically, for the first capital call, you’ll write a check or wire the money out of your bank account. That transaction will come in from your bank as an automatic update — minus $5,000 or minus $8,000 for example. Take that value and transfer it to the private equity account, giving it a positive addition in the same amount.
  3. Increase the value by future calls and adjust for NAVs. As you add more capital to the investment, transfer the investment to the private equity account each time, increasing the value. If it’s a private equity fund that’s sending you reports, adjust the value manually to reflect the value reported as those come out. If you label it “Increase (or Decrease) in value,” the value in Quicken will always represent the most recent NAV plus any capital you’ve added since, and your historical Quicken data will represent those changes over time.
  4. Adjust for cash received. Hopefully, that fund is going to send you cash back. As it does, those funds will show up in your bank account, and you’ll need to transfer that amount from your private equity account in Quicken. At times, that will make your private equity account look “overdrawn,” showing a negative value because the fund produced more than you put in (which is what you want from any investment). Simply true up the account by adding a manual increase in value to what the post-distribution NAV should be.

Using this process, you’ll track the hard cash flows in and out of your bank account as well as all the value moves of the private investment, which is great for historical performance.

It’s also helpful when you start thinking about capital planning. If you have 5 or 10 of these, for example, and you’re going to be capital called year after year after year, using this system to track your private investments in Quicken is a great way to plan for that.

Into investing? Track your portfolio in Quicken.

Whether you have a significant portfolio or you’re looking to build one over time, Quicken is built to make tracking your finances and investments more intellectually clear.

It’s built to be a tool — with a seriousness of purpose. You can run your household on it. You can manage your investments on it, both public and private. You can see your whole financial picture and how that picture is moving.

Quicken has been helping people set and track key performance indicators and reach their financial goals for more than 35 years. If you’d like to see how it works, you can download and try it risk free with our 30-day, money-back guarantee.