While often seen as exclusive, private equity has become increasingly accessible to a broader range of investors in recent years. How can investors new to this asset class get into private equity? In this blog, learn more about the benefits and limitations of investing in private equity and how to find investment opportunities.

How to Get into Private Equity

Compared to the stock market, private equity focuses on investing in companies that are still private. The most common types of private equity include:

• Venture Capital: Focused on startups and early-stage companies with high growth potential.
• Growth Equity: Targeting mature companies seeking expansion capital.
• Buyouts: Acquiring controlling stakes in established companies to enhance performance.

How Can Investors Participate in Private Equity?

Direct Investments

Also known as primary investments, investors have the ability to directly invest in private companies. Many private equity investments are limited to accredited investors, or those that meet specific income, net worth, or knowledge criteria. However, other investors, also known as non-accredited, are able to participate in equity crowdfunding opportunities in private companies.

Secondary Market Investments

The secondary market allows investors to buy stakes in private equity from existing shareholders. These investments often involve more mature companies that have gone through multiple funding rounds already. Secondary investments may not have the same investment terms as the original direct investment but can be a popular way to invest in private equity.

Private Equity Funds

Private equity funds pool resources to invest in either direct investments or secondaries, offering access to ventures that otherwise may be unattainable for individual investors. These funds—including venture capital, growth equity, and buyout funds—can have minimum investments of $5,000 or more and typically cater to accredited investors. Some funds may have target companies identified, and others may make discretionary investments in companies that meet the investment thesis laid out by the fund.

Publicly Traded Private Equity Firms

Investors can gain exposure to private equity by purchasing shares in publicly traded private equity firms or in exchange -traded funds (ETFs) that hold shares of those firms. This option provides liquidity and transparency while offering indirect access to the broader private equity market. However, these assets may trade at a premium to net asset value and offer limited diversification.

Benefits of Investing in Private Equity

Diversification

Private equity can offer investors a chance to diversify their portfolios by accessing opportunities that are unavailable in public markets. Private market investing can provide diversification versus the public market in addition to diversifying by industry, growth stage, or other criteria.

Be a Part of the Ground Floor

eInvesting in private equity allows investors to get involved with innovative companies or transformative ideas at an early stage. This ground floor access can offer a chance to play a role in driving meaningful business growth and innovation. Being a part of a startup’s early growth can be rewarding for many investors.

Limitations of Investing in Private Equity

Illiquidity

Private equity investments are typically long-term commitments, with funds often locked up for several years. This lack of liquidity is generally not appropriate for investors who may need quick access to their capital, making it essential to have other liquid assets in their portfolio. Investors should be prepared to hold their investment until failure or exit, which could be 5, 10, or even 15+ years away.

Limited Transparency

Unlike publicly traded companies, private equity investments lack the same level of disclosure and reporting. This limited transparency can require investors to perform thorough due diligence to understand the risks, performance potential, and overall viability of their investments. It can be particularly challenging for less experienced investors to evaluate opportunities effectively.

High Fees

Private equity funds can come with steep fees, including management fees and performance-based carry fees. These costs can significantly eat into an investor’s profits, particularly if the investment does not perform as expected. Understanding the fee structure can be important to ensuring alignment between the investor’s goals and the private equity firm’s incentives.

Potential Loss

As with any investment, private equity carries the risk of loss, including the potential for a complete loss of invested capital. Factors such as poor management, market conditions, or unforeseen challenges can negatively impact business and investment results. This makes it very important for investors to carefully assess the risks before committing funds and only invest what they are willing to lose.

Steps to Get Started

Understand Your Investment Goals

Before diving into private equity, it can be important to evaluate your financial goals, risk tolerance, and liquidity needs. Consider factors like how much capital you’re willing to lock away for extended periods and what role private equity will play in your overall portfolio.

Educate Yourself

The private equity landscape can be complex, so take time to learn about how it works. Familiarize yourself with different fund structures, investment strategies, and the industries or sectors that a proposed private equity investment opportunity targets. Building this foundational knowledge can help you to make more informed decisions.

Evaluate Opportunities

Carefully research the investment offerings, private equity firms, platforms, and their associated specific opportunities and risks. Assess their track record, fee structures, and alignment with your financial goals. Due diligence is important to identifying reputable firms and avoiding potential pitfalls.

Commit Long-Term

Private equity investments require patience, as returns are not guaranteed, and private market investments are illiquid. Be prepared to hold your investments for the long term, and never invest more than you can afford to lose.

Final Thoughts

Private equity may offer compelling opportunities for investors willing to embrace its long-term nature and associated risks. Whether through direct investments, funds, or secondary markets, understanding the landscape can be important for informed decision-making.

Are you ready to invest in private equity? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in private equity? Check out the following MicroVentures blogs to learn more:

• New Frontiers: Investing in Emerging Markets
• 2025 IPO Outlook
• Trends and Industries to Watch 2025
• The ABCs of Equity

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.