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3 ways to invest in private equity

You can invest in unlisted companies that may become the next corporate juggernauts, but there's a high degree of risk.

If you’re looking to maximize your investment returns, you may want to consider private equity. Investing in private equity is a way to invest in companies that aren’t publicly listed.

In other words, you can’t yet purchase their stocks. But they can prove to be thriving powerhouses in the future. As a private equity investor, you’d get an early crack at their success.

How to invest in private equity

There are many ways for different types of investors to get into private equity. We’ll outline a few.

1. Invest directly in a private equity fund or venture capital fund

Private equity funds are pooled investment vehicles that collect money from many investors. The fund managers often use this money to invest in companies they believe have potential and room for improvement. They play an indirect role in improving the company. For instance, they may change the companies’ management or streamlining operations. Eventually, they sell these companies for a profit in what’s known as a buyout.

As a private equity investor, you get a cut of those profits based on how much you invested. When you invest in private equity funds, you become a limited partner to the fund. This means the most you can lose is the amount of money you invested in the fund.

Another type of private equity fund is a venture capital fund. These funds focus on investing in startups and early-stage companies with high growth potential. Investors in venture capital funds get a return when these startups go public through an initial public offering (IPO) or when another company steps in for a merger or acquisition.

Private equity funds are usually restricted to investors with net-worths of at least $1 million. And minimum investments are usually a few hundred thousand dollars or a few million. But average investors have other avenues to private equity.

2. Invest in stocks of funds like Blackstone or KKR

Instead of investing directly in a private equity fund, you can buy stocks of the companies that manage private equity funds. These are often called private equity firms, and they operate as legitimate investment advisors.

Examples include Blackstone (NYSE: BX) and KKR (NYSE: KKR). All you need is a brokerage account to buy shares of these stocks.

3. Invest in a fund or ETF tracking private equities

You can also invest in private-equity ETFs. These are baskets of stocks from private equity firms. This move adds a layer of diversification since you could be investing indirectly in hundreds of companies. You just need a brokerage account, and you can begin trading shares of these ETFs.
Here are some examples:

  • VanEck Vectors BDC Income ETF (NYSEARCA: BIZD)
  • Invesco Global Listed Private Equity ETF (NYSEARCA: PSP)
  • ProShares Global Listed Private Equity ETF (BATS: PEX)
  • ETRACS Quarterly Pay 1.5X Leveraged Wells Fargo BDC Index ETN (NYSEARCA: BDCX)

Risks of investing in private equity

There are plenty of risks you should be aware of before you invest in private equity.

  • Access. Private equity funds are typically restricted to accredited investors as defined by the US Securities and Exchange Commission (SEC). To qualify as one, you must meet at least one of the following requirements:
    • Have an income of $200,000 USD (or $300,000 USD combined with a spouse) in each of the prior two years
    • Have a net worth over $1 million USD, either alone or together with a spouse (excluding the value of your primary residence)

    But just because you meet the SEC’s accredited investor criteria doesn’t mean you can invest in any private equity fund. The companies that manage private equity funds may have their own requirements.

  • Investment minimums. When it comes to private equity funds, investment minimums are usually very high. Think a couple hundred thousand dollars or as much as $25 million.
  • Time horizon. Before you see any returns, the private equity fund needs to sell the companies it invests in for a profit. This can take time. According to the SEC, that time frame often stretches 10 or more years.
  • Disclosures not required. Although the advisors that manage private equity funds may be registered with the SEC, the funds themselves are not. This means fund advisors don’t need to disclose documents showing key information about the fund’s financials or management. So carefully review as much information as you can find about a private equity fund.
  • Fees. If you’re investing directly in a private equity fund, management fees could diminish your returns. Remember, the funds are managed by investment companies or advisors. Thus, the funds owe them management fees. And if you’re invested in a private-equity ETF, you’d face expense ratios as you would with any ETF. Depending on your brokerage account, you may also see trading or management fees. This will also be a factor if you’re investing in individual stocks of private equity firms. So be sure to compare your brokerage account options.
  • Companies are high-risk. Remember, private equity funds typically invest in startups and companies not yet public. These companies tend to be young with limited track records. Your returns depend on their potential to be the next big thing — and this doesn’t always happen.
  • Private companies vs. public companies

    Public companies are firms listed on the major stock exchanges. This means you can purchase stocks of these companies through a broker or by using an online brokerage account. Private companies are the opposite. You can’t yet buy their stock. So you’d need to find other ways to invest in these companies. For example, you can invest in a private equity fund that invests in these companies.

    Bottom line

    Private equity is a high-risk, long-term investment that has traditionally been reserved for affluent and experienced investors. But today, you can indirectly access private equity through ETFs, stocks of publicly listed private equity firms and other assets. So even average investors can access private equity. But this doesn’t eliminate the risks associated with private equity investments, which require your utmost due diligence.

    Before you can invest in private equity, you need a brokerage account. These vary and can add another layer of risk in the form of high fees and minimum deposits. So make sure you compare investment platforms to find the one that’s right for you.

    Frequently asked questions

    Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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