Private Equity Investing: A Guide To Getting Started

Private equity is a form of investment that takes place outside of the public stock market. It allows investors to gain an ownership stake in private companies. Private equity firms invest in companies that are not publicly traded, with the goal of increasing the company's value, selling it at a higher price, and making a profit. Private equity investments are often high-risk, early-stage ventures, usually in sectors such as software and healthcare. The minimum investment in private equity funds is typically $25 million, although it can sometimes be as low as $250,000 or even $25,000. Investors should plan to hold their private equity investment for at least 10 years. There are also non-direct ways to invest in private equity, such as funds of funds, exchange-traded funds (ETFs), and special purpose acquisition companies (SPACs).

Private equity real estate funds

To invest in private equity real estate funds, individuals or couples must meet the criteria of "accredited investors," having personal or joint assets of at least $1 million or a yearly income of at least $200,000. The minimum investment requirement is typically around $250,000, and investors should be prepared to commit significant capital upfront and for the long term, as these funds offer little flexibility and liquidity.

Risks and long-term outlook

Private equity investing is not for the faint of heart. It is a high-risk, illiquid, and costly endeavour. Investors should be prepared to tie up their capital for a long time, often a decade or more. Private equity funds are structured as long-term investments, and there is usually little to no opportunity to withdraw money.

There are multiple risks in the real estate market, and a large amount of investment may be required during capital calls when an individual has low cash flow. Private equity funds are also not required to disclose much information, so it can be very difficult to evaluate a fund's financial performance or the properties it holds.

As a limited partner, you will have limited liability, meaning the maximum you can lose is the amount you invested in the fund. However, if you fail to meet a capital call, you may be forced into default and forfeit your entire ownership share.

Private equity investing is very speculative and there is no guarantee that the companies you invest in will succeed. There are also few protections for investors if things go wrong. The fees for private equity investments that cater to smaller investors can also be higher than for conventional investments, reducing returns.

Additionally, as private equity investing becomes more accessible to more people, it may become harder for private equity firms to find excellent investment opportunities. Some private equity investment vehicles with lower minimum investment requirements also do not have long track records to compare to other investments.

However, despite these drawbacks, private equity has historically resulted in higher returns than public market investments. According to the Bain & Company Global Private Equity Report 2023, private market returns have outperformed public market returns over every time horizon.

Alternative investments

Private equity is a form of investment that takes place outside of the public stock market. It allows investors to gain an ownership stake in private companies. Private equity funds are pooled investments offered by private equity firms that allow a group of investors to combine their assets to invest, typically in a company or business.

Private equity investments are generally only accessible to accredited investors and institutional investment firms. Accredited investors are defined as individuals with a net worth of over $1 million or an annual income of at least $200,000 in the past two years. They are assumed to have enough financial wealth to bear the higher risks associated with alternative investments.

The minimum investment in private equity funds is typically $25 million, although some firms have lowered their minimums to $250,000 or even $25,000. There are also non-direct ways to invest in private equity, such as funds of funds, exchange-traded funds (ETFs), and special purpose acquisition companies (SPACs).

Private equity firms invest in companies that are not publicly traded, with the goal of increasing the company's value and selling it at a higher price for profit. This strategy of "buying to sell" is often not employed by public companies, which usually "buy to keep". Private equity firms may also invest in real estate, acquiring properties and improving their operations and strategies to increase their value.

Private equity investments can be very risky and speculative. There is no guarantee that the companies invested in will succeed, and there are limited protections for investors if they fail. Additionally, private equity investments are highly illiquid, as investors may need to hold their investments for at least 10 years.

Despite the risks, private equity investments can offer the potential for higher returns compared to public market investments. They allow investors to diversify their portfolios and take on more risk in exchange for potentially higher rewards.

Minimum investment requirements

Private equity investments are not easily accessible to the average investor. The minimum investment in private equity funds is typically $25 million, although it can be as low as $250,000 or even $25,000 in some cases. However, even the lower threshold is still out of reach for most people.

As a result, most private equity firms seek investors who can commit a substantial amount of capital, typically ranging from a few hundred thousand to several million dollars. Consequently, private equity investing is predominantly reserved for institutional investors, such as pension funds or private equity firms themselves, or high-net-worth individuals.

In addition to meeting the minimum investment requirements, prospective investors must also be accredited. This means that their net worth, either individually or combined with a spouse, exceeds $1 million. Alternatively, they must have earned an annual income of more than $200,000 in each of the previous two years.

For those who cannot meet the stringent minimum investment requirements, there are a few alternative ways to gain exposure to private equity:

• Funds of funds: These hold shares in multiple private partnerships that invest in private equities, allowing for greater diversification and potentially lower minimum investment requirements.
• Exchange-traded funds (ETFs): Investors can purchase shares of ETFs that track an index of publicly traded companies investing in private equities, without the need to worry about minimum investment thresholds.
• Special Purpose Acquisition Companies (SPACs): These are publicly traded shell companies that make private equity investments in undervalued private companies. However, SPACs can be risky due to their narrow focus and potential pressure to meet investment deadlines.
• Crowdfunding: This approach involves raising small amounts of capital from multiple individual investors, often through dedicated online platforms. While these investments can be highly risky, they provide an opportunity for smaller investors to participate in private equity.

Non-direct ways to invest

There are a few non-direct ways to invest in private equity, including:

• Funds of funds: These hold the shares of many private partnerships that invest in private equities. This can increase cost-effectiveness and reduce the minimum investment requirement, while also offering greater diversification. However, there is an additional layer of fees to pay to the fund manager.
• ETFs (exchange-traded funds): You can purchase shares of an ETF that tracks an index of publicly traded companies investing in private equities. There are no minimum investment requirements, but there is an extra layer of management expenses, and you may have to pay a brokerage fee or commission each time you buy or sell shares.
• Special Purpose Acquisition Companies (SPACs): SPACs are publicly traded shell companies that make private equity investments in undervalued private companies. However, they can be risky as they may only invest in one company, and they may be under pressure to meet investment deadlines.
• Crowdfunding: A recent development in private equity, crowdfunding involves raising small amounts of capital from individual investors. While these investments can be highly risky, they do offer a wider range of people the opportunity to invest in private equity.

Frequently asked questions