How to Invest in Private Equity

There are two main ways to invest in private equity. The first, and most common, is to invest through a private equity firm. However, it’s also restricted to accredited investors. These are investors who are wealthy or experienced or both. The second way, and most accessible, is to invest in ETFs and other funds that track the performance of private equity firms and related investments. Whatever path you choose, here’s everything you need to know if you’re wondering how to invest in private equity.

Consider working with a trusted financial advisor who can help manage your portfolio and create a comprehensive financial plan for you and your family.

What Is Private Equity?

Private equity is a form of direct investment in companies. It exists outside of the stock market (or public equity markets). This means that private equity assets are not publicly traded (hence the name). Instead, private equity firms make individual deals with the companies that they’re buying or investing in.

There are several different ways that private equity can work. But in most cases, a firm will make one of three main types of investments:

Startup Funding. The private equity firm will directly invest in a new or emerging company, funding it in exchange for ownership or a stake in future profits.
Venture Capital. The private equity firm will directly invest in an existing company. This provides the company with additional funding in exchange for ownership or a stake in future profits.
Acquisitions and Leveraged Buyouts. The private equity firm will purchase an existing company. The goal will be to make changes to this company and then re-sell it (either whole or in parts) for more than it was worth at the time of acquisition.

Private Equity Examples

For example, you might invest $10 million in a private equity firm and express an interest in technology startups. The firm would pool your money along with its other investors in the tech startup portfolio, and look for relevant opportunities in the market.

Now, say that the private equity firm finds XYZ App, a startup company looking to launch the next big app. The firm might provide XYZ App with $50 million in startup funding in exchange for 10% of the company. If the app succeeds, that 10% will be worth more money. That will increase the value of the investment portfolio. And you would get returns based on your proportional share in that portfolio.

What makes this transaction different from buying stocks is twofold: First, our app company was not publicly traded. This firm did not trade stocks on a secondary market like the NASDAQ or NYSE.

Second, the private equity firm reached an individual deal with the company to fund it in exchange for a share of ownership. Unlike with publicly traded stocks, where investors chiefly make trades among each other, the private equity’s money went directly into the business.

How to Invest in Private Equity

There are two main ways to invest in private equity: direct investment and ETFs.

Direct Investment in Private Equity

Direct investment in private equity means that you seek out a private equity firm and invest your money with them.

Per our example above, this is structured the same as investing in any other fund-based asset. You buy shares of a private equity firm’s portfolios based on their options, your interests, and your risk tolerance. The firm will then pool your money with the rest of that portfolio and use that capital to make investments. The portfolio will generate returns based on the performance of its underlying investments. And you’ll receive a percentage of those returns based on your share in the portfolio.

The main difference is that, with private equity, the fund directly invests in other companies rather than publicly traded assets. (Although in the case of an acquisition, the private equity fund may purchase public shares of stocks to acquire the target company.)

How to Make a Direct Investment in Private Equity

The rewards of private equity can be high (imagine getting in on the ground floor of Facebook). However, the risks are equally high (imagine getting in on the ground floor of Friendster). As a result, direct investment in private equity is restricted to accredited investors. This is generally defined as an investor with more than $1 million in assets, or a minimum household income of $200,000 for a single person and $300,000 for a married couple.

In addition, because of the scope at which private equity works, most firms require very high initial investments. Private equity firms often require a minimum investment of between $10 million and $25 million up front.

If you qualify as an accredited investor and have the capital, the next step is to contact private equity firms and start looking for firms that match your interests. A financial advisor is a useful resource for this. Major firms include The Carlyle Group, Blackstone, and CVC Capital Partners. If you have an existing broker relationship, consult with them for recommendations. You’re looking for a firm that matches your needs in terms of investment categories and risk management.

ETF Investment in Private Equity

Most investors will be legally disqualified from investing in private equity directly. Not to mention, they’ll be practically disqualified by the high capital requirements of this field. However, there are many exchange-traded funds, or ETFs, which are built to track the performance of private equity firms.

They can do this in several ways. For example:

An ETF might invest in companies that themselves invest in private equity firms
It might invest in companies funded or acquired by private equity firms
Or it might directly invest in private equity firms themselves

Regardless of the underlying structure, an ETF attempts to track the performance of private equity firms. The goal is to give you exposure to this market without the high entry requirements of direct investment. It is also unlikely that an ETF could provide the same kind of high returns as a direct investment.

Benefits and Risks of Private Equity

Private equity appeals to many investors because of its potential for high returns, access to unique opportunities, and ability to diversify an investment portfolio beyond public markets. But these advantages come with significant trade-offs, including illiquidity, long holding periods, high fees, and the possibility of losing your entire investment.

When deciding whether this strategy aligns with your financial goals and risk tolerance, it’s important to have a good understanding of both sides of the equation. The following chart outlines some of the benefits and risks it helps to be aware of.

Benefits	Risks
Potential for outsized returns – Private equity investments can deliver higher returns than traditional public market assets.	Illiquidity – Funds are often locked up for 7–10 years with no access to your capital during that time.
Diversification from public markets – These investments move independently of stock market trends, offering portfolio diversification.	Long investment horizon – Returns often take many years to materialize, requiring patience and a long-term mindset.
Access to unique opportunities – Investors can participate in early-stage companies, turnarounds, or niche sectors not available on stock exchanges.	High fees – Management fees and carried interest can significantly reduce net returns.
Active ownership and influence – Investors, through the private equity firm, often have a say in management decisions and strategic changes.	Potential total loss of capital – Particularly when investing in startups or distressed companies, there is a real risk of losing your entire investment.

Bottom Line

There are two main options when it comes to how to invest in private equity.

Private equity is a form of investing in which firms directly invest in companies, such as through startup funding and venture capital. Direct investment in private equity is restricted to accredited investors. But you can invest in publicly traded ETFs that give you exposure to this market.

Tips on Investing

Consider working with a financial advisor as you look for investment growth opportunities. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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