London Daily

Focus on the big picture.
Friday, Aug 22, 2025

What is private equity? It's like a private investing club, where you buy a piece of non-public companies

What is private equity? It's like a private investing club, where you buy a piece of non-public companies

When you hear the words private equity, a few things probably come to mind: palatial estates, sleek suits, private islands, and, well, money. Lots of it. But if you're among those who think only characters from "Billions" or other billionaires can be involved in the world of private equity (PE), it's time to think again.

Mere millionaires can be involved too. Or those with even less.

Private equity investments are called "private" because they involve buying shares or an ownership stake in private companies or funds, rather than ones traded publicly on the stock market.

Adding private equity to your portfolio opens up a broad new world of investment opportunities that can offer above-average returns. Here's what you need to know before getting started with private equity investing.


What is private equity?


Investing in private equity is a little like dining at a private, members-only club, as opposed to eating in a restaurant that's open to the public.

At its core, private equity consists of investment opportunities in companies or business ventures that are not available on any of the open, public financial markets. They don't have shares that trade daily on a stock exchange, like the Nasdaq or New York Stock Exchange.

Unlike publicly traded stocks or mutual funds and ETFs, private equity funds are not regulated by the Securities and Exchange Commission (SEC), which means they are typically more appropriate for knowledgeable and experienced investors.


How does private equity investing work?


Investing in private equity ventures done through private funds, run by private equity firms with specific investment strategies and areas of expertise.

The vast majority of investors in a private equity fund are known as limited partners (LPs): They simply put up the capital, receiving an ownership stake or shares in the fund in return. In contrast, the fund's general partners (GPs) are responsible for managing and executing the fund's investments. They own a smaller percentage of the shares, too.

In essence, private equity funds gather large sums of money from investors who are in it for the long haul. This money is used to restructure or revamp a struggling company, fund acquisitions and start-ups, or take a company public.

Private equity often requires long investment holding periods, because it takes a while before projects like turning around a troubled firm or launching an initial public offering (IPO) can garner positive returns. The average lifespan of a private equity fund is about 10 years.

At the end of the period, investors get their money back, plus hefty (hopefully) profits raised from sales and IPOs. In certain cases, like that of a real estate limited partnership, investors may also earn regular income along the way, but most of the return is paid at the end.


Who should consider private equity investing?


Private equity funds are out of reach for many investors because they tend to have substantial minimum contribution requirements.

How substantial? Let's put it this way: Some private equity funds will allow you to buy in for as little as $250,000. Others have capital contribution requirements that reach up into the millions.

Many private equity funds are only available to institutional and accredited investors, who are thought to be more experienced and thus able to take on the risk of investing in securities not regulated by the SEC. An accredited investor is one with a net worth exceeding $1 million who's earned an income above $200,000 — or $300,000 if filing jointly — for the past two years.


What are the main types of private equity investments?


Private equity investments take a variety of shapes.


Distressed funding


Distressed funding deals with struggling businesses that have filed for Chapter 11 bankruptcy, allowing them to seek help by agreeing to restructure their business model and create a repayment plan for their debts. In some cases, private equity firms intend to help these businesses by changing up the management and turning the business around. In other cases, it's more about selling the business's assets for a profit.


Leveraged buyouts


A leveraged buyout also involves buying a struggling business, but this time, the goal is for the business to improve its model before being sold for a profit, or issuing an IPO. This type of buyout is the most common form of private equity investment and is often handled by buyout specialists.


Venture capital


Venture capital investing involves offering start-up or early-stage funding for entrepreneurs aiming to ramp up their businesses. It can include providing Series A funding, which is aimed at helping the business optimize its user base and product offerings after demonstrating clear potential.


Specialized Limited Partnerships


Some private equity firms set up funds that invest in specific types of assets. Real estate is especially popular for these funds. Specifically, they often invest in commercial spaces, or in multifamily structures like apartment buildings. Other private equity funds invest in infrastructure projects like bridges and roadways.


Cheaper ways to invest in private equity


Although traditional private equity is only open to high-net-worth or accredited investors, some forms of PE are more democratic — they don't require six figures to play. Here, in rough order of sophistication and means required:

*  Angel investing: Angel investors are seasoned entrepreneurs or well-off professionals who put money into start-ups and younger businesses in exchange for part-ownership. Often this is real seed money, for firms too young or small for venture capitalists. Angel investors' stake averages around $75,000.

* Equity crowdfunding: Like other crowdfunding models, equity crowdfunding involves a company or private business using an online platform to raise money from numerous individuals. However, instead of just getting a gift or a cool product, as with regular rewards crowdfunding, private equity crowdfunders actually get part ownership in the business. Additionally, equity crowdfunding's pooled structure means that minimum contribution requirements can be as low as $2,000 or as high as $100,000 — it depends on the investor's income. As an added bonus, these platforms are subject to SEC regulation.

*  Fund of funds: A fund of funds is a pooled investment fund that invests in other funds, especially high-end mutual funds and hedge funds. They're priced similarly to mutual funds and usually come with minimum investing thresholds of around $1,000.
Private equity ETFs: There's an exchange-traded fund (ETF) for everything these days. A private equity ETF primarily invests in private companies. They're offered by investment companies that sponsor ETFs, like Invesco (the Invesco Global Listed Private Equity Portfolio) or ProShares (the ProShares Global Listed Private Equity Portfolio), to name two popular ones. With these publicly traded funds, you can buy any number of shares you want, usually.

What are the pros and cons of private equity investing?


Like any other type of investment, private equity investing comes with a distinct set of advantages and disadvantages.


The upsides of private equity


*  Private equity offers the potential for substantial returns. Part of the general partner's art is identifying promising companies to invest in, which can be grown and sold off, or taken public, for a big profit.

*  For the limited partner, private equity funds are real set-it-and-forget-it investments — the GP does all the work. Perfect for the passive investment crowd.

The downsides of private equity


*  Private equity funds carry a lot of fees. Since these investments are unregulated, there's no limit to the amount that private equity firms can charge. Performance fees are paid to the general partners/fund managers for producing positive returns, and the "2 and 20" annual fee structure is common: a firm charges an annual management fee of 2% of the assets being managed and a 20% performance fee on profits generated.

*  Private equity investments are illiquid. Private equity firms often require investors to keep their money in the fund for at least three to five years.

*  Private equity investments can be high-risk. The companies are untried or troubled, and they may not live up to their potential.

The bottom line


While private equity investing is certainly not for everyone, for those with the capital, it can be a fairly easy way to achieve higher-than-normal returns.

That said, before you decide to go this route, you'll want to do your research on the fund itself, its accompanying fees, and the success of its previous investments. Unfortunately, this information can often be difficult to find, since unregulated funds are not required to share information as readily as public investment funds, like master limited partnerships, mutual funds, or real estate investment trusts (REITs).

That's one reason why private equity investments traditionally have been the realm of institutional investors and sophisticated accredited investors.

But some of the newer private equity investment options, like equity crowdfunding and private equity ETFs, allow investors of smaller means to play — and get in on a promising start-up long before it gets discovered by the public market.

Newsletter

Related Articles

0:00
0:00
Close
After 200,000 Orders in 2 Minutes: Xiaomi Accelerates Marketing in Europe
Ukraine Declares De Facto War on Hungary and Slovakia with Terror Drone Strikes on Their Gas Lifeline
Animated K-pop Musical ‘KPop Demon Hunters’ Becomes Netflix’s Most-Watched Original Animated Film
New York Appeals Court Voids Nearly $500 Million Civil Fraud Penalty Against Trump While Upholding Fraud Liability
Elon Musk tweeted, “Europe is dying”
Far-Right Activist Convicted of Incitement Changes Gender and Demands: "Send Me to a Women’s Prison" | The Storm in Germany
Hungary Criticizes Ukraine: "Violating Our Sovereignty"
Will this be the first country to return to negative interest rates?
Child-free hotels spark controversy
North Korea is where this 95-year-old wants to die. South Korea won’t let him go. Is this our ally or a human rights enemy?
Hong Kong Launches Regulatory Regime and Trials for HKD-Backed Stablecoins
China rehearses September 3 Victory Day parade as imagery points to ‘loyal wingman’ FH-97 family presence
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
MSNBC Rebrands as MS NOW Amid Comcast’s Cable Spin-Off
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
William and Kate Are Moving House – and the New Neighbors Were Evicted
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
Taylor Swift on the Way to the Super Bowl? All the Clues Stirring Up Fans
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Apple Expands Social Media Presence in China With RedNote Account Ahead of iPhone 17 Launch
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Bill Barr Testifies No Evidence Implicated Trump in Epstein Case; DOJ Set to Release Records
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
Emails Worth Billions: How Airlines Generate Huge Profits
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
JPMorgan Plans New Canary Wharf Tower
Zelenskyy and his allies say they will press Trump on security guarantees
Beijing is moving into gold and other assets, diversifying away from the dollar
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
The Drought in Britain and the Strange Request from the Government to Delete Old Emails
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
"No, Thanks": The Mathematical Genius Who Turned Down 1.5 Billion Dollars from Zuckerberg
The surprising hero, the ugly incident, and the criticism despite victory: "Liverpool’s defense exposed in full"
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
×