Table of Contents
Private equity involves partnerships, whereby qualified investors combine their capital in a private equity fund, which in turn funnels the money into an ownership stake in other companies in order to manage, overhaul, and/or acquire them.
The goal of private equity firms is to then sell these companies for more than they invested. The key word in private equity is “private” — as these companies don’t trade on public exchanges.
Private equity investing requires a significant amount of capital, typically invested for a period of years; thus it’s generally only available to high net-worth or accredited investors. Individual investors may be able to access private equity through exchange-traded funds (ETFs) and other vehicles.
Private equity, which is a type of alternative investment, has a high-stakes reputation for good reason, as these investments can be highly risky.
Key Points
• Private equity investments use a strategy whereby qualified investors pool their capital into a fund that’s used to manage or take over other companies.
• The goal of private equity investing is to sell the target companies for a profit.
• Owing to the amount of capital involved, and the longer time commitment, private equity is typically only available to high-net-worth or accredited investors.
• Private equity firms do not trade on public exchanges, and are not subject to SEC regulations.
• Private equity is considered a type of alternative investment.
What Is Private Equity?
Private equity can be confused with hedge funds and venture capital, but it’s important to understand what private equity is and how it differs from other high-risk alternative strategies.
Private equity firms raise capital from institutional and accredited investors in order to set up private equity funds that can then be used to buy, manage, and/or acquire other companies.
Private equity firms are typically not publicly traded on a stock exchange or regulated by the Securities and Exchange Commission (SEC), and typically neither are the companies they invest in.
With publicly traded companies, investors purchase shares of the company on a public market such as the New York Stock Exchange (NYSE), or buy stock online. With private equity, qualified investors can combine their assets to invest in private companies that aren’t typically available to the average investor.
Key Characteristics of Private Equity
Certain characteristics help define private equity:
• Private equity firms pool capital from various investors into a designated fund that can then invest in private companies (those typically not listed on public exchanges).
• A private equity investment typically involves large sums of money, invested for a period of years.
• Private equity is typically available to high net-worth, institutional, and accredited investors.
• Most retail investors would have to use other vehicles, such as exchange traded funds, or ETFs, to gain exposure to PE strategies.
• Private equity funds also use leverage to invest in target companies.
• The goal of private equity is to make a profit by overhauling a company and its product or operations, by breaking it apart and selling off parts of it, or by selling the company in an acquisition later.
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How Do Private Equity Firms Work?
Private equity firms have funds that allow qualified investors to pool their assets in order to invest in existing private companies and manage them. PE firms typically don’t target startups, but rather mature companies that may benefit from restructuring or other interventions. Note that this process is separate from the type of self-directed investing most individual investors are familiar with.
Private equity investors are referred to as limited partners. They are often high net-worth individuals or institutions such as endowments or foundations. Equity firms usually require a sizable financial commitment from limited partners for a long period of time to qualify for this investment opportunity.
The equity firm uses the assets from investors to help the companies they invest in achieve specific objectives — like raising capital for growth or leveraging operations.
Private Equity Objectives
To help further these objectives, equity firms offer a range of services to the companies they invest in, from strategy guidance to operations management.
The amount of involvement and support the firm gives depends on the firm’s percentage of equity. The more equity they have, the larger the role they play.
In helping these private companies reach their business objectives, private equity firms are working toward their own goal: to exit the relationship with a large return on their investment. Equity firms may aim to receive their profits a few years after the original investment. However, the time horizon for each fund depends on the specifics of the investment objectives.
The more value a firm can add to a company during the time horizon, the greater the profit. Equity firms can add value by repaying debt, increasing revenue streams, lowering production or operation costs, or increasing the company’s previously acquired price tag.
Many private equity firms leave the investment when the company is acquired or undergoes an initial public offering (IPO).
Role of General Partners and Limited Partners
In private equity firms, general partners and limited partners play very different roles.
• General partners are typically those who are involved in the oversight of a private equity fund, taking a more strategic role. For example, a general partner may look for target companies to invest in, evaluate these opportunities, and then oversee the companies ultimately added to the private equity firm’s portfolio.
• Limited partners are the investors who put up the capital for these partnerships: e.g., pension funds, endowments, HNW investors. They are typically less involved in daily operations, and as such they assume less risk for the success or failure of the companies in the portfolio.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Types of Private Equity Funds
Typically, private equity funds fall into three categories: Venture Capital (VC), Leveraged Buyout (LBO) or Buyout, and Growth Equity.
Venture Capital Funds
Venture capital (VC) funds focus their investment strategy on young businesses that are typically smaller and relatively new with high growth potential, but have limited access to capital. This dynamic creates a reciprocal relationship between VC fund investors and emerging businesses.
The start-up depends on VC funds to raise capital, and VC investors can possibly generate large returns.
Leveraged Buyout
In comparison to VC funds, a leveraged buyout (LBO) is typically less risky for investors. LBO or buyouts often target mature businesses, which may generate higher rates of return. On top of that, an LBO fund typically holds ownership over a majority of the corporation’s voting stock, otherwise known as controlling interest.
Growth Equity
In some cases, a private equity fund may invest in an established company that has a working business model, but requires capital in order to expand. This is considered a growth equity play.
Can Anyone Invest in Private Equity?
According to the SEC, under securities laws, private equity funds are not registered or regulated as investment companies. Thus, a PE fund cannot offer its securities on a public exchange. In addition, in order to remain exempt from securities regulations, the structure of private equity funds must fall within one of three defined categories:
• a traditional 3(c)(1) fund with no more than 100 owners
• a 3(c)(7) fund that’s limited to qualified investors
• and a qualifying VC fund
So when it comes to how to invest in private equity, only qualified or accredited investors are allowed to become limited partners in a private equity fund. Because private equity funds are not registered with the SEC, investors must understand the risk of such investments and be willing to lose their entire investment if the fund doesn’t meet performance expectations.
Since the initial investment is typically pretty high, and may be well into the millions of dollars, an individual must meet strict criteria to qualify as an individual accredited investor.
• A person must make over $200,000 per year (for two consecutive years) as an individual investor or $300,000 per year as a married couple.
• Alternatively, an investor can qualify as accredited if they have a net worth of at least $1 million individually or as a married couple to qualify (excluding the value of their primary residence), or if they hold a Series 7, 65, or 82 license.
• In addition, some private equity opportunities may require that investors be considered qualified investors, which can mean having assets of at least $5 million.
Other examples of accredited investors include insurance companies, pension funds, and banks.
Direct vs. Indirect Investment Options
As interest in private equity has grown, and private equity firms have sought to develop new avenues to give retail investors that access, there are a growing number of direct and indirect private equity investment options.
• Direct private equity investments include new offerings from large financial institutions as of Q2 2025, that include a mix of public and private assets. These may include active as well as index options. Some platforms also offer investors the chance to invest their capital into so-called feeder funds, which provide exposure to certain private equity strategies.
• Indirect private equity investments can include ETFs, and Limited Investment Trusts (LITs), which are closed-end funds that enable investors to pool their capital in a multi-asset fund.
How to Invest in Private Equity
As noted above, there are an increasing number of options for average investors seeking to gain exposure to private equity, including:
Publicly traded stock: Some private equity firms have publicly traded stock that investors can buy shares of. This includes PE firms like the Carlyle Group, the Blackstone Group, and Apollo Global Management.
Funds of funds: Mutual funds are restricted by the SEC from buying private equity, but they can invest indirectly in publicly traded private equity firms. This is known as funds of funds.
Interval funds: These closed-end funds, which are not traded on the secondary market and are largely illiquid, may give some investors access to private equity. Interval funds may invest directly or indirectly through a third-party managed fund in private companies. Investors may be able to sell a portion of their shares back to the fund at certain intervals at net asset value (NAV). Interval funds typically have high minimum investments.
Advantages and Disadvantages of Private Equity
While private equity funds provide the opportunity for potentially larger profits, there are some key considerations, costs, and high risks investors should know about.
Advantages
Here are some possible benefits of private equity investments.
Potentially Higher Returns
With private equity, returns may be greater than those from the public stock market. That’s because PE firms tend to invest in companies with significant growth potential. However, the risk is higher as well.
More Control Over the Investment
Private equity investors are typically involved in the management of the companies they are invested in.
Diversification
Private equity investments allow investors to invest in industries they may not be able to invest in through the public stock market. This may help them diversify their holdings.
Disadvantages
The drawbacks of investing in private equity include:
Higher Risk
Private companies are not required to disclose as much information about their finances and operations, so PE investments can be riskier than publicly traded stocks.
Lack of Liquidity
Private equity funds tend to lack liquidity due to the extensive time horizon required for the investment. Since investors’ funds are tied up for years, equity firms may not allow limited partners to take out any of their money before the term of the investment expires. This might mean that individual investors are unable to seek other investment opportunities while their capital is held up with the funds.
Conflicting Interests
Because equity firms can invest, advise, and manage multiple private equity funds and portfolios, there may be conflicts. To uphold the fiduciary standard, private equity firms must disclose any conflicts of interest between the funds they manage and the firm itself.
High Fees
Private equity firms typically charge high management fees and carry fees. Upon investing in a private equity fund, limited partners receive offer documentation that outlines the investment agreement. All documents should state the term of the investment and all fees or expenses involved in the agreement.
Private Equity Comparisons
Private equity is one type of alternative investment, but there are others. Here’s how a few of them compare.
Private Equity vs IPO Investing
From an investor’s standpoint, private equity investing means you’re putting money into a company, and hopefully making money in the form of distributions as the company becomes profitable.
Investing in an IPO, on the other hand, means you’re buying stocks in a new company that has just gone public. In order to make money, the company’s stock price needs to rise, and then you need to sell your stocks in that company for more than you initially paid.
Private Equity vs Venture Capital
Venture capital funding is a form of private equity. Specifically, venture capital funds typically invest in very young companies, whereas other private equity funds typically focus on more stable companies.
Private Equity vs Investment Banking
The difference between these two forms of investing is of the chicken-and-egg variety: Private equity starts by building high-net-worth funds, then looks for companies to invest in. Investment banking starts with specific businesses, then finds ways to raise money for them.
The Takeaway
Private equity firms manage funds that invest in private companies that are typically not available to investors. Sometimes these companies are small and new with high growth potential; in other cases, the companies are well-established, and may offer a higher rate of return.
Not everyone qualifies to invest in private equity. If you do qualify, it’s important to remember that while private equity funds may offer the opportunity for profitability, they also come with some hefty risks. As with any investment, it’s a good idea to make sure you fully understand the risks of investing in a private equity fund before moving forward.
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FAQ
What’s the history of private equity?
Pooling money to buy stakes in a private company can be traced back to the early days of the industrial revolution, when this type of financing was a common source of equity for the burgeoning railroad industry. Modern private equity took hold in the 20th century, however, with its roots in venture capital firms that emerged after WWII. Private equity as it’s known today gained popularity when leveraged buyouts took off in the 1980s.
How does private equity make money?
Private equity firms make money by buying companies they consider to have value and potential for improvement. PE firms then make improvements, which in turn, can increase profits. These firms also benefit when they can sell the company for more than they bought it for.
How much money do you need to invest in private equity?
Private equity funds have very high minimum investments that typically start at $1 million, with a diversified portfolio reaching much higher than that. In addition, an individual usually needs to be an accredited investor with a net worth of at least $1 million, or an annual income higher than $200,000 for at least the last two years ($300,000 for those who are married).
What are common private equity exit strategies?
Common exit strategies for private equity firms include initial public offerings (IPOs), where a refurbished once-private company goes public; secondary buyouts, whereby a company is sold to another private equity firm; and liquidation, when a company is dissolved and sold off.
Is private equity suitable for individual investors?
It depends. While direct investments in private equity are generally out of reach for most individual investors, today there are investment options that provide private equity exposure for individuals. These include ETFs, and closed-end funds (like interval funds), and typically permit lower minimums than traditional PE funds.
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