If you\u2019re 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\u2019s important to consider the risks and ramifications. <\/p>\n\n\n\n
Here\u2019s the lowdown on private equity \u2014 including how to start investing. <\/p>\n\n\n\n
\u201cPrivate equity\u201d refers to ownership in companies and assets that don\u2019t trade publicly. The field is dominated by specialty firms and funds that either:<\/p>\n\n\n\n
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. <\/p>\n\n\n\n
With rare exceptions, private equity investing requires three parties:<\/p>\n\n\n\n
See how Quicken helps you track your private equity. Private equity investments may have several benefits not found in regular stocks. <\/p>\n\n\n\n Because these companies don\u2019t answer to public shareholders, their value doesn\u2019t 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. <\/p>\n\n\n\n As a result, private market returns have consistently outpaced<\/a> public market returns since 2002. <\/p>\n\n\n\n While not risk-free, private equity investments CAN limit risk in one important way. Since investors are usually designated \u201climited partners,\u201d they have limited liability. In other words, they can\u2019t lose more than they invest \u2014 even if the acquired business fails. <\/p>\n\n\n\n Private equity investments offer great promise. However, they\u2019re also incredibly risky, especially for beginner investors. Below, we\u2019ll explore some of the most important risks. <\/p>\n\n\n\n Private equity boasts great returns \u2014 but at great risk. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Private equity investments tend to be very illiquid, especially in their early years. \u201cIlliquid\u201d means that investors can\u2019t easily sell their investments. Most private equity firms aim to stay invested for at least 10 years. Many also \u201clock up\u201d investor funds for at least 5-7 years before they can withdraw their funds. <\/p>\n\n\n\n Private companies don\u2019t have to follow the same SEC regulations as public companies. As such, private investors don\u2019t have access to the same information as public investors. <\/p>\n\n\n\n Additionally, private equity firms aren\u2019t 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<\/a> that would have required increased transparency and accountability for private investments.) <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Many critics argue that PE investing impacts the economy and investors in negative ways. Because these firms \u201cflip\u201d businesses, they may engage in extreme cost-cutting measures like:<\/p>\n\n\n\n Many firms also use \u201cleveraged buyouts\u201d to acquire assets. (More on these below.) This strategy saddles the acquired company with debt that can cause future bankruptcies. <\/p>\n\n\n\n Private equity firms have even been blamed for worse patient outcomes<\/a> and higher bills<\/a> at acquired hospitals. <\/p>\n\n\n\n One unusual aspect of private equity is that not everyone is eligible to buy in. <\/p>\n\n\n\n Typically, private equity firms limit their eligibility to three groups:<\/p>\n\n\n\n See why investors love Quicken. Most of the investments below are designed for accredited or institutional investors. However, smaller players can still get in on the action. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Today, investors can buy publicly traded shares of private equity firms. Examples include Blackstone, the Carlyle Group, and Apollo Global Management. <\/p>\n\n\n\n Generally, mutual funds and ETFs can\u2019t own private equity due to SEC transparency rules. But they can get around these rules by investing in:<\/p>\n\n\n\n Many of these funds are considered \u201cfunds of funds.\u201d That means they\u2019re funds that invest in other <\/em>funds that own or manage private equity. <\/p>\n\n\n\n Sometimes, PE investors sell their investments to other investors instead of waiting for their money to \u201cunlock.\u201d This happens in the secondary private equity market. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Firms invest in these assets through several strategies and mechanisms, including: <\/p>\n\n\n\n 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. <\/p>\n\n\n\n In a buyout, private equity funds typically buy a company outright. (They might also take a \u201ccontrolling interest\u201d in the company.) <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Buyout strategies may take the form of:<\/p>\n\n\n\n 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. <\/p>\n\n\n\n Some funds buy \u201cdistressed investments.\u201d 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.\u00a0<\/p>\n\n\n\n See how Quicken helps you keep a close eye on all your investments. Many investors can\u2019t or won\u2019t invest in private equity directly. But if you decide to get involved, it\u2019s smart to go in with a plan. <\/p>\n\n\n\n Private equity investments require investors to ask some difficult questions, like:<\/p>\n\n\n\n Once you\u2019ve 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? <\/p>\n\n\n\n Not all private equity investments require you to be accredited (but most do). Becoming accredited doesn\u2019t 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\u2019s background check. (Plus the minimum investment amount ready to go.) <\/p>\n\n\n\n Before making any investment, conduct your due diligence. <\/p>\n\n\n\n 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\u2019ll do if the investment deviates from this strategy.<\/p>\n\n\n\n If you\u2019re crowdfunding, ask about the product, business plan, and key competitors. <\/p>\n\n\n\n In short: Get informed \u2014 and stay informed as long as you\u2019re invested. <\/p>\n\n\n\n If you have the desire and cash to invest in private equity, it\u2019s a good idea to hire a financial advisor to help. You can even track your private equity investments<\/a> along with the rest of your portfolio, but you\u2019ll need the right tools. <\/p>\n\n\n\n Enter Quicken. <\/p>\n\n\n\n Quicken lets you manage all your money \u2014 including your spending, savings, debt, retirement funds, brokerage accounts, and private equity investments \u2014 all in one place.<\/p>\n\n\n\n
\n Get started \u2192<\/a><\/p>\n<\/div>\n\n\n\n\nBenefits of investing in private equity<\/h2>\n\n\n\n
Drawbacks and risks of investing in private equity<\/h2>\n\n\n\n
High-reward = high-risk <\/h3>\n\n\n\n
Very low liquidity <\/h3>\n\n\n\n
Transparency concerns<\/h3>\n\n\n\n
High minimum investments and fees<\/h3>\n\n\n\n
Economic impacts of private equity<\/h3>\n\n\n\n
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Eligibility criteria for investors<\/h2>\n\n\n\n
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\n Get started \u2192<\/a><\/p>\n<\/div>\n\n\n\n\nWays to invest in private equity<\/h2>\n\n\n\n
Direct investments in private companies<\/h3>\n\n\n\n
Private equity funds<\/h3>\n\n\n\n
Buying private equity firm public shares<\/h3>\n\n\n\n
ETFs and mutual funds <\/h3>\n\n\n\n
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Secondary markets for private equity<\/h3>\n\n\n\n
Crowdfunding platforms<\/h3>\n\n\n\n
Understanding private equity acquisitions<\/h2>\n\n\n\n
Growth capital investments<\/h3>\n\n\n\n
Buyouts <\/h3>\n\n\n\n
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Venture capital<\/h3>\n\n\n\n
Distressed investments<\/h3>\n\n\n\n
\n Get started \u2192<\/a><\/p>\n<\/div>\n\n\n\n\nSteps to start investing in private equity<\/h2>\n\n\n\n
Evaluate your financial situation and risk tolerance<\/h3>\n\n\n\n
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Set clear investment goals<\/h3>\n\n\n\n
Become an accredited investor (if needed)<\/h3>\n\n\n\n
Conduct thorough due diligence<\/h3>\n\n\n\n
Tracking your private equity investments<\/h2>\n\n\n\n