How to Invest in Private Equity (2024)

Private equity is capital made available to private companies or investors. The funds raised might be used to develop new products and technologies, expand working capital, make acquisitions, or strengthen a company's balance sheet.Unless you are willing to put up quite a bit of cash, your choices in investing in the high-stakes world of private equity are minimal.

Key Takeaways

  • Private equity investing includes early-stage, high-risk ventures, usually in sectors such as software and healthcare.
  • These investors try to add value to the companies they invest in by bringing in new management or selling off underperforming parts of the business, among other things.
  • The minimum investment in private equity funds is typically $25 million, although it sometimes can be as low as $250,000.
  • Investors should plan to hold their private equity investment for at least 10 years.
  • Non-direct ways to invest in private equity include funds of funds, ETFs, and special purposes acquisition companies (SPACs).

Why Invest in Private Equity?

Institutional investors and wealthy individuals are often attracted to privateequity investments. This includes large university endowments, pension plans, and family offices. Their money becomesfunding for early-stage, high-risk ventures and playsa major role in the economy.

Often, the money will go into new companies believed to have significant growth possibilities in industries such astelecommunications, software, hardware, healthcare, and biotechnology. Privateequity firms try to add value to the companies they buy andmakethem even more profitable. For example, they might bring in a new management team, add complementary companies,aggressively cut costs,or spin off parts of the business that are underperforming.

Minimum Investment Requirement

Privateequity investing is not easily accessible for the average investor. Most privateequity firms typically look for investors who are willing to commit as much as $25 million. Although some firms have dropped their minimums to $250,000 (or even $25,000), this is still out of reach for most people.

Ways to Invest in Private Equity

There are a few non-direct ways to invest in private equity.

Fund of Funds

A fund of funds holds the shares of many private partnerships that invest in private equities. It provides a way for firms to increase cost-effectiveness and reduce their minimum investment requirement. This can also mean greater diversification since a fund of funds might invest in hundreds of companies representing many different phases of venture capital and industry sectors. In addition, because of its size and diversification, a fund of funds has the potential to offer less risk than you might experience with an individual privateequity investment.

Mutual funds have restrictions in terms of buying private equity directly due to the SEC's rules regardingilliquidsecurities holdings. The SEC guidelines for mutual funds allow up to 15% allocation to illiquid securities. Also, mutual funds typically have their own rulesrestricting investment in illiquid equity and debt securities. For this reason, mutual funds that invest in private equity are typically the fund of funds type.

The disadvantage is there is an additional layer of fees paid to the fund or funds manager. Minimum investments can be in the $100,000 to $250,000 range, and the manager may not let you participate unless you have a net worth between $1 million to $5 million.

PrivateEquity ETF

You can purchase shares of an exchange-traded fund (ETF) that tracks an index of publicly traded companiesinvesting in private equities. Since you are buying individual shares over the stock exchange, you don't have to worry about minimum investment requirements.

However, like a fund of funds, an ETF will add an extra layer of management expenses you might not encounter with a direct, privateequity investment. Also, depending on your brokerage, each time you buy or sell shares, you might have to pay a brokerage fee or commission.

SpecialPurpose Acquisition Companies (SPACs)

You can also invest in publicly traded shell companies that make private-equity investments in undervalued private companies, but they can be risky.The problem is that the SPACmight only invest in one company, which won't provide much diversification. They may also be under pressure to meet an investment deadline, as outlined in their IPO statement. This could make them take on an investment without doing theirdue diligence.


A recent development in private equity is the use of crowdfunding to raise capital, especially for new ventures, from individual investors, each contributing a relatively small amount. Today, there are several platforms offering a range of investment opportunities—but note that these investments can be highly risky.

If you participate in equity crowdfunding, make sure you do so as an investor and not as a donor (as in the case of Kickstarter-like crowdfunding platforms). Donating doesn't imply a hope for return, but investing does.

How Much Money Do You Need to Invest in Private Equity?

Although you may be able to find a private investment opportunity that requires as little as $25,000, a common private equity investment minimum is $25 million. However, there are some non-direct ways to invest in private equity for much less, such as buying a share of a private-equity ETF.

How Do I Get Into Private Equity?

There are several ways to branch into private equity investing, including through mutual funds, exchange-traded funds, SPACs, and crowdfunding. However, keep in mind that many private equity opportunities are only offered to qualified investors and may require a sizable minimum commitment as well as a high net worth.

How Risky Is Investing in Private Equity?

Private equity investing can be very speculative and therefore very risky. There is no guarantee the companies you invest in will succeed, and few protections for you if they fail.

The Bottom Line

There are several key risks in any private equity investing. As mentioned earlier, the fees of private-equity investments that cater to smaller investors can be higher than you would normally expect with conventional investments, such as mutual funds. This could reduce returns. Additionally, the moreprivateequity investing opens up to more people, the harder it could become for privateequity firms to locate excellent investment opportunities.

Plus, some of the privateequity investment vehiclesthathave lower minimum investment requirements do not have long histories for you to compare to other investments. You should also be prepared to commit your money for at least ten years; otherwise, you may lose out as companies emerge from the acquisition phase, become profitable, and are eventually sold.

Companies that specialize in certain industriescan carry additional risks. For instance, many firms invest only in hightechnology companies. Their risks can include:

  • Technology risk:Will the technology work?
  • Market risk:Will a new market develop for this technology?
  • Company risk:Can management develop a successful strategy?

Despite its drawbacks, if you are willing to take a little more risk with 2% to 5% of your investment portfolio, the potential payoff of investing in private equity could be big.

How to Invest in Private Equity (2024)


Can a regular person invest in private equity? ›

There are several ways to branch into private equity investing, including through mutual funds, exchange-traded funds, SPACs, and crowdfunding. However, keep in mind that many private equity opportunities are only offered to qualified investors and may require a sizable minimum commitment as well as a high net worth.

How much money do you need to invest in private equity? ›

MInIMuM InveStMentS

Many private equity funds require a minimum commitment of $10 million or more. Through Morgan Stanley, however, you can participate in many of these funds for a minimum of $250,000.

Is private equity a good investment? ›

You may be aware of the longstanding question about whether private equity returns have historically outperformed public equity. The simple answer is: yes, by a significant margin.

How do I get into private equity? ›

Private equity firms usually look for entry-level associates with at least two years of experience within the banking industry. Investment bankers usually follow the PE firm career path as their next job and typically have a bachelor's degree in finance, accounting, economics, and other related fields.

What is the rule of 72 in private equity? ›

The Rule of 72 is a convenient method to estimate the approximate time for invested capital to double in value. By merely taking the number 72 and dividing it by the rate of return (or interest rate) expected to be earned, the output is the approximate number of years for an investment to double.

How risky is investing in private equity? ›

Risk of loss: Overall, private equity investments involve a high degree of risk and may result in partial or total loss of capital.

What is the 80 20 rule in private equity? ›

80% of your returns will usually come from 20% of your investments. 20% of your investors will usually represent 80% of the capital. For portfolio companies. 20% of your customers will usually represent 80% of your profits.

What is the 2 20 rule in private equity? ›

The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.

What is the average ROI for private equity? ›

According toCambridge Associates' U.S. Private Equity Index, PE had an average annual return of 14.65% in the 20 years ended December 31,2021. In comparison, theCambridge Associates U.S. Venture Capital Index found that VC returns averaged 11.53% in the same 20-year period.

What is the main disadvantage of private equity investment? ›

Higher risk: Private equity investments often involve significant risks, including the potential loss of your entire investment, which must be part of the individual investors' consideration process.

Is BlackRock a private equity firm? ›

Private equity is a core pillar of BlackRock's alternatives platform. BlackRock's Private Equity teams manage USD$41.9 billion in capital commitments across direct, primary, secondary and co-investments.

What are the odds of getting into private equity? ›

For a student looking to break into one of the top 10 PE firms, your chance is 1 in 300 or 0.33%. To break into one of the top 10 hedge fund firms, your chance is 1 in 147 or 0.68%.

What is private equity for beginners? ›

Private equity is ownership or interest in entities that aren't publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges.

Do you need an MBA for private equity? ›

Although most large private equity firms look exclusively for job candidates with an MBA, you can still get into a smaller firm without one. Smaller firms prefer candidates with an MBA, but it's not always a requirement.

Can you make a lot of money in private equity? ›

Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.

Can an individual investor invest in private equity? ›

Even with the high minimums typically required to invest in private equity, there are some individuals - or families - that can afford it. They make up a fraction of the total assets under management in private equity, but they have still found access through traditional means for decades.

Do you have to be accredited to invest in private equity? ›

Non-accredited investors are also able to invest in private businesses, but these opportunities are limited and subject to other requirements, such as additional disclosures related to the investment.

Can an individual invest in a private company? ›

An individual investor you can invest in private companies, but only through side options like an ETF or a mutual fund. An individual investor cannot invest in private companies directly because they are restricted to accredited and institutional investors.

Can only accredited investors invest in private equity? ›

Private investments such as private equity, hedge funds, venture capital and stock in start-up companies generally require investors to be “accredited.”

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