If you’re ready to branch out from traditional, publicly traded investments, private equity offers the potential to earn significantly higher returns. But before you take that leap, you need to understand what a different investing world you’re entering.
From 10,000 feet, investing in publicly traded stocks and private equity feels the same. With stocks, you look into both investments and accounts—and with PE, you look into private equity firms and crowdfunding platforms. You need to carefully consider what type of private equity you want to invest in, what your time horizon is, and your risk tolerance.
Still, there are some differences. Private equity firms’ exit strategies vary. So do their investment minimums, liquidity, type of assets they hold, and more.
Before you invest in private equity, then, you’ll need to make sure you understand what it is, which investments you’re qualified for, and how it differs from public market investing. And I’ll cover all of this below.
Let’s go over the different types of private equity investments, then take a look at some of the top private equity firms and crowdfunding platforms.
What Is Private Equity?
Private equity is a type of investment where the investor receives partial ownership of a privately held company in exchange for investing their capital.
Frequently, people invest in private equity through private equity funds. Private equity funds share similarities with mutual funds in that both pool together investors’ money and use it to make investments on behalf of the funds.
However, private equity investments differ from buying stocks or funds on a stock exchange. The companies that trade on the stock exchanges are publicly owned companies that anyone can buy a stake in, which also makes them highly liquid investments. However, private equity involves private companies, held by a small number of owners, that are more difficult to exit quickly.
Depending on the private equity fund, investors may receive distribution payments, capital appreciation, or both.
Who Can Invest in a Private Equity Fund?
Typically, only institutional investors and high-net-worth investors (known as accredited investors) can invest in private equity funds. Usually, the minimum initial investment amount is high, which is why the opportunity isn’t available to all investors.
Depending on the fund, the minimum investment might be hundreds of thousands or even millions of dollars, so the barrier to entry is clearly high—indeed, too high for many investors, even some accredited ones.
How Do Private Equity Investments Work?
Private equity firms collect money from qualified investors. Then, the firms invest in varying types of private equity on their investors’ behalf.
These firms might engage in various types of private equity, such as:
- Distressed funding (buying equity or debt in distressed companies)
- Leveraged buyouts (purchasing a company using mostly or even all borrowed money)
- Venture capital (providing financing to startups and other small businesses)
The firm continuously measures the efficiency of the companies it has invested in and evaluates the progress of its investments, making adjustments and liquidations as necessary. Eventually, the firm exits the investment, often when a privately owned company goes public, and cashes in on the gains from the resulting initial public offering (IPO).
Investors get part of the returns, which are historically higher returns than those of publicly traded companies. Usually, around 80% of the proceeds are split among investors, while the remainder goes to the private equity firm.
Related: 8 Best Personal Capital Alternatives
Who Should Consider Private Equity Investing?
Most private equity funds are only available to accredited investors. Often, a private equity investment also has a high minimum investment required to get started.
For these reasons, private equity is usually a better fit for high-net-worth individuals. However, there are some platforms with lower investment minimums.
A private equity fund is typically a long-term, illiquid investment. Short-term investors might want to look elsewhere, but private equity can be a great fit for patient, long-term investors. Investing in private equity can be lucrative, but it can also be risky, so it also works best for investors who have a high risk tolerance.
Consider working with a private equity firm if you’re looking for a way to diversify your investment portfolio. Private equity funds aren’t strongly correlated to the stock market, making them an excellent alternative investment in a diversified portfolio.
If you choose to invest in private equity, make sure the private equity firm invests only in companies that have been thoroughly vetted to reduce your risk.
What Are Accredited Investors?
Accredited investors are high-net-worth individuals or entities permitted to invest in securities that aren’t registered with the Securities and Exchange Commission (SEC). The SEC estimates that only 13% of U.S. households qualify.
According to the SEC Rule 501 of Regulation D, to be considered an accredited investor, you must meet at least one of the following criteria:
- Have a yearly income over $200,000 (or more than $300,000 of joint income with your spouse) for the previous two years, with the expectation of earning at least that much in the current year.
- Have a net worth of over $1 million, either individually or jointly with your spouse.
- Be a general partner, director, or executive officer for the business issuing the unregistered securities.
- Hold a Series 7, 65, or 82 license.
Non-accredited investors still have options, though: They can invest in exchange-traded funds (ETFs) that hold publicly traded companies that invest in private equities. They can also invest via crowdfunding platforms—just note that some crowdfunding platforms also only accept investors that are accredited.
What Types of Private Equity Investments Exist?
Let’s take a look at the most common types of private equity.
1. Venture Capital Funds
When a private equity firm raises venture capital funds, that money is invested in startup companies with high growth potential. It could be seed money to scale up a promising new idea, or early-stage financing to help the company grow out of infancy.
The VC firm can often guide the inexperienced team running the startup and help it improve its business operations.
In exchange for venture capital, the early-stage company usually gives its backer an equity stake. If and when the company achieves high growth or profitability, it can be sold to a new owner, or offered to the public via an IPO on the stock market. In the latter case, the VC firm can then sell its initial ownership stake in the company for a profit. (Sometimes, however, VCs provide venture debt—basically just loans to early-stage companies.)
2. Growth Equity
Growth equity is a type of private equity investment where investors focus on investing in companies that have the opportunity for extremely rapid growth.
For example, a PE firm might want to acquire another business or expand into a new market. Their target acquisitions are usually mature businesses with little to no debt.
Investors seeking this type of growth-oriented opportunity might form private equity firms, investment funds (such as hedge funds or mutual funds), or late-stage venture capital firms to invest in growth equity.
Investing in private equity this way is different from putting up venture capital in that the holding period is typically shorter, and it’s generally a lower-risk investment. After all, growth equity involves taking a stake in a company that is established and is operating successfully, whereas VC investments target promising but very new companies that might be years away from turning a profit.
3. Leveraged Buyouts
Leveraged buyouts involve buying an entire company outright. Private equity firms typically use a combination of equity and debt to finance leveraged buyouts. In most cases, they target businesses that show significant room for improvement. Once the company is purchased, the acquiring firm assumes control and tries to run its new acquisition more efficiently. If it succeeds, the owner typically resells the acquired company at a profit.
Think of this like the real estate investors who “flip” houses, buying them cheap, fixing them up, then quickly reselling them for a higher price. But in this situation, it’s an entire company that’s being flipped.
To accomplish the business equivalent of a home makeover, a private equity firm might reduce the number of employees, replace a CEO, or implement a variety of other tactics to make the business more profitable and enhance its attractiveness to future buyers.
4. Distressed Funding
Private equity investors extend distressed funding to struggling companies that are underperforming, perhaps because their debt load is too high or other financial reasons. The increased cash flow is meant to help turn the business around and show a healthy profit.
These aren’t just any struggling companies, though; they generally have successful business models and strong products. The business needs to have the potential to increase in value in order to be a good candidate for distressed funding.
Private equity firms might provide financing to purchase needed machinery, a better real estate location, or other capital improvements that can help the struggling company grow. Company management is often replaced, as well.
Again, the investors’ goal is to later sell the company at a profit or enable it to go public. This type of investment tends to be highly risky, since the company may not succeed, even after putting the new financing to work.
Fortunately for distressed funding investors, if the company goes bankrupt, they can still recover some or all of the money they put into the business, so they don’t necessarily lose their entire stake. How much they get back in bankruptcy proceedings will depend on how much money the failed firm owes its creditors, and how much money can be raised from selling off its assets.
On the flipside, if the company becomes successful and then is sold or goes public, the gains for the investors that provided distressed funding can be substantial.
5. Specialized Limited Partnerships (SLPs)
Limited partners help supply a company with capital, but they aren’t responsible for managing the company, making improvements, or selling it. A private equity firm takes care of all of that.
Specialized limited partnerships (SLPs) involve investing in private equity funds through affiliate funds—a type of fund dedicated to investments in a specific geographical region.
If you’re involved in an SLP, you might be investing in commercial real estate spaces, apartment buildings, bridges, or other infrastructure projects.
Typically, you receive your return on your investment when the private equity firm sells the company you have invested in. The PE firm takes its cut—often 20% of the resulting gain—and the rest is divided among the fund investors.
How Is Private Equity Different From Public Market Investing?
The primary difference between investing in private equity versus companies whose stocks trade publicly is, in the former, you’re investing in privately owned companies that are subject to relatively little regulation, whereas the latter involves investing in companies that are bought and sold on the major stock exchanges. Unlike privately held companies, publicly traded ones are closely regulated by the SEC.
However, there are other key differences to be aware of.
Private equity investments tend to be illiquid, long-term investments. Sometimes that means locking up your money with little chance to get it back for a few months; more often, it takes years or even a decade to see a return on your investment.
You can’t quickly sell private equity like you can with stocks that trade every day on the major exchanges, so you should only invest money that you can afford to leave tied up for a long time. If a potentially better investment opportunity comes along, you can’t quickly liquidate your position and use your private equity money to fund it.
Because of this illiquidity risk, private equity investments tend to pay a premium over publicly traded stocks. Otherwise, investors would gravitate toward publicly traded stocks and ETFs, which can be bought and sold in seconds with any online brokerage.
Private equity funds have high and varied risk.
PE funds aren’t required to disclose financial statements or earnings reports for auditing, making it challenging for investors to find reliable information about them. It can also be challenging to determine a realistic valuation of private companies, which makes them a riskier investment. Because their shares don’t trade publicly, you won’t find a market capitalization figure for a privately owned company to show how much Wall Street thinks the business is worth.
If you’re providing venture capital to a startup, there is a good chance the startup won’t survive for more than a few years. Investing in a startup is pretty much always riskier than investing in more mature companies with established business models. For instance, the risk of a debt default can be significantly higher for private companies than for publicly traded ones. And if you’re providing equity capital to a startup that fails, you could lose most or all of your investment.
Multiple Ownership Structures
Privately owned businesses operate across a number of ownership structures.
Among the most common types are sole proprietorships, where one person owns the business outright; partnerships with at least two owners; limited liability companies with multiple owners; S corporations (meaning, no more than 100 shareholders), and C corporations (which can have an unlimited number of shareholders).
Private companies may issue stock to shareholders, but this stock isn’t available for everyone to buy or sell on public exchanges.
Not Traded on an Exchange
Private equity investments aren’t listed on public exchanges. You need to work with a private equity firm or have other connections. The company might later decide to go public and end up trading on an exchange, but the growth potential might not be as high at that point.
With private equity investments, investors are typically paid through distributions of the profits the business generates and the gains that result from the sale of the business.
How the expected distributions will work is described in a private placement memorandum. The distribution “waterfall” describes how capital will be distributed to investors when the underlying investment is sold, hopefully at a profit. The waterfall visual comes from the tiered structure of the payments. Once the requirements of the first tier are met, the remaining capital “cascades” down to the next tier, and so on.
First, investors receive back all of their initial outlays. Then, preferred returns are paid out to investors according to the rate specified in the private placement memorandum.
Next, the fund’s general partners are paid until they reach a set percentage of profits, usually based on participation. Finally, the carried interest—a fixed percentage of distributions the general partners receive—is paid out, as well.
Accredited and Institutional Investors Only
While anyone is allowed to partake in public market investing, only accredited investors and institutional investors are generally able to invest in private equity funds.
Depending on where you live, though, there is sometimes an exception to this rule, if your private equity investment is through a crowdfunding platform.
More Accessible Private Equity Firms and Crowdfunding Platforms
With private equity crowdfunding, sometimes just called equity crowdfunding, individual investors are offered debt or equity in exchange for a slice of ownership in a company. These services streamline the process and make investing in private businesses relatively simple. Most of these services are still only open to accredited investors, but in a few cases, folks who don’t meet the income or asset thresholds to be accredited can also participate.
First National Realty Partners (Grocery-anchored commercial real estate)
- Available: Sign up here
- Minimum initial investment: $50,000
First National Realty Partners (FNRP) is one of the fastest-growing vertically integrated CRE investment firms in the United States. It’s also focused on a very particular niche: grocery-anchored commercial real estate.
FNRP’s team leverages relationships with top-tier national-brand tenants—including Kroger, Walmart, Aldi, Target, and Whole Foods—to provide investors with access to institutional-quality CRE deals both on- and off-market. Unlike many of the other sites on this list, which are equity crowdfunding platforms, FNRP offers private placements that only an accredited investor can access.
They’ve helped thousands of investors increase their net worth and diversify their portfolios against market volatility through deals that yield steady cash flow.
FNRP also progresses from an entire investment lifecycle, from acquisition through disposition, 100% in-house. A large team of professionals filters through thousands of deals to choose a handful they believe will outperform their peers.
Unlike a traditional real estate investment trust (REIT) or fund, you have the ability to pick the deals that best align with your investment needs, so you can use FNRP’s various offerings to build your own portfolio.
This relative exclusivity does, however, come with a high minimum investment of $50,000. Sign up to learn more about the opportunity and determine whether it makes sense for your investment goals.
- Available: Sign up here
- Minimum initial investment: $5,000
EquityMultiple aims to make real estate investing simple, accessible, and transparent for accredited investors.
Investors can choose among three investment approaches:
- “Grow” equity funds focused on significant capital appreciation opportunities
- Long-term durations with a minimum investment of $20,000.
- “Earn” yield-focused funds (senior debt and preferred equity)
- Medium-term durations, with a minimum investment of $10,000.
- “Keep” savings account alternatives (short-term, diversified notes)
- Short-term durations and yields that beat CDs, with a minimum investment of $5,000.
EquityMultiple stands out from other private equity firms and crowdfunding platforms in the diversity of offerings. The platform usually focuses on mid-cap commercial real estate and investments with a strong cash flow.
- Available: Sign up here
- Minimum initial investment: $10,000
Yieldstreet is one such platform leading the charge to provide access to income generating assets in a number of asset classes.
Yieldstreet is an alternative investment platform that provides you with income-generating opportunities. These investment options come backed by collateral, typically have low stock market correlation, and span various asset classes. Such asset classes include:
- Art finance
- Real estate
- Commercial finance
- Legal finance
- And more
Yieldstreet, which has been in business since 2015, has returned more than $2.2 billion to its investors since its founding.
Yieldstreet currently boasts a net annualized return (measured by internal rate of return, or IRR) of 9.6% across all its investments since inception. But that’s an average: Historically, annual returns range anywhere from 3% to 18%, depending on the goal-based strategy. Yieldstreet offers predefined payment schedules (e.g., monthly or quarterly payments), and they may pay principal and interest upon the occurrence of certain events, such as settlement within a legal finance investment.
The durations of investment opportunities range from three months to seven years. Investment minimums start as low as $10,000, but can go well into mid-five digits.
Yieldstreet technically is open to all investors, as non-accredited and accredited investors alike can participate in the Yieldstreet Prism Fund. However, you must be an accredited investor to participate in all other Yieldstreet offerings.
Learn more, and consider accessing these passive income investments, by opening an account today.
- Available: Sign up here
- Minimum initial investment: $500
Percent is an investment platform designed for accredited investors who are interested in accessing private credit (non-bank lending).
You can diversify your portfolio with investments such as …
- small business lending in Latin America
- U.S. litigation finance
- Canadian residential mortgages
- merchant cash advances
Percent has built a way for retail accredited investors to access a wide range of private credit opportunities with a clear view into their performance through its innovative tools and comprehensive market data. That allows investors to make better-informed decisions, source and compare opportunities, and monitor performance with ease.
This platform also provides access to an alternative investment that’s a little more liquid than other alts, with some debt investments only lasting nine months, with liquidity available after the very first month in some cases.
The service targets annualized returns on unsecured notes between 12% to 18% on average and up to 20%. And while investment minimums vary, many Percent opportunities require only $500 to invest.
If you’re interested, visit Percent’s site to learn more or open an account.