Private equity investing has seen remarkable growth. These markets have quadrupled in size in the past 15 years.
Public companies listed on stock exchanges represent just a small fraction of the total investable universe. This holds true even in deep markets like the United States. Many investors are keen to learn how to get into private equity investing. Private equity investing is an alternative investment class that has outperformed public equities in various market conditions. Private equity investing is now more accessible, but you should learn how it works first.
The current high valuation environment presents an intriguing scenario. Public markets would need to jump by 80% to match the returns that private markets deliver. This significant performance gap drives sophisticated investors to keep allocating capital to this alternative asset class.
This piece walks you through everything about starting your private equity trip. You’ll learn the simple concepts and make your first investment. Let’s dive in!
Step 1: Understand What Private Equity Investing Is
Private equity (PE) is a unique investment category that puts capital into private companies instead of publicly traded ones. To participate successfully in this alternative asset class, you need to understand its basics.
How private equity is different from public markets
Private equity investments buy ownership stakes in companies not listed on stock exchanges, unlike public equities. Public markets let you trade instantly through exchanges, but private equity needs more patience—investments usually take 4-7 years. Private equity investors also take a hands-on ownership approach and work closely with management teams to boost business operations and create value.
This active strategy pays off—private equity has outperformed public markets by more than 500 basis points annually on a net basis in the past 25 years. Private equity-backed companies show stronger growth and better profit margins than their publicly traded counterparts.
Types of private equity investments
The private equity world covers several distinct strategies:
- Leveraged Buyouts (LBOs): The most common type that buys controlling interests in mature companies, often with debt financing
- Growth Equity: Investments in established businesses that need expansion capital, usually with less debt than buyouts
- Venture Capital: Funding for early-stage startups that have high growth potential but limited capital access
- Distressed Investing: Focus on troubled companies that need critical financing
- Secondary Buyouts: Deals where PE firms trade portfolio companies among themselves
Who typically invests in private equity
Private equity has traditionally been available for:
- Institutional investors: Pension funds put about 9% of their portfolios into private equity, while sovereign wealth funds have grown their allocations from 12.6% to over 28.3% in the last two decades
- Ultra-high-net-worth individuals: People with investable assets above €28.63 million, who often invest through family offices that typically put 24-27% into private equity
- Accredited investors: People who meet specific income or net worth requirements
The private equity world is changing. Traditional funds require minimum investments of €4.77–10 million, but new platforms now let qualified investors join with as little as €50,000. This makes private equity available to many more investors than before.
Step 2: Learn the Key Asset Classes in Private Markets
You need to understand different asset classes in private markets to build a diversified investment portfolio. Each type of investment plays a unique role in your strategy and comes with its own risk-return profile.
Private equity vs. venture capital
Private equity and venture capital sit at opposite ends of the private investing world. Private equity firms invest in businesses that are at least several years old with proven revenue streams. They usually buy complete ownership with investments that exceed €95.42 million. On the flip side, venture capital targets startups and early-stage companies. These investors typically buy minority stakes up to 50% with smaller investments of €9.54 million or less.
The difference goes deeper than just size. Venture capital bets on high-growth startups that operate in the technology, biotechnology, and cleantech sectors. Most of these companies fail, but a single success can deliver wonderful returns. Private equity takes a different approach. It focuses on mature companies of all sizes and aims to create value by improving operations and restructuring finances.
Private debt and income-generating strategies
Private debt is a vital alternative to traditional bank lending. This market now manages €1.53 trillion in assets. It grew by a lot after the 2008 financial crisis when banks cut back on corporate lending.
The market includes direct lending to mid-sized companies, mezzanine financing that combines debt with equity features, and speciality finance like equipment leasing and litigation funding. Private debt gives investors several advantages. The floating-rate structure protects against rising interest rates. You get quarterly income payments, and returns have beaten public fixed income historically.
Real estate and infrastructure investments
These physical assets help diversify your portfolio. Private real estate investments target commercial properties like offices, industrial spaces, retail locations, and apartment buildings. The market also includes speciality properties, such as hotels and data centres. Real estate has beaten inflation during high-inflation periods and doesn’t move in sync with stocks and bonds.
Infrastructure investments in transportation networks, utilities, and energy assets deliver steady, long-term cash flows that often rise with inflation. This sector shows huge promise. We need €14.31 trillion more than what governments plan to spend on global infrastructure through 2040.
Step 3: Know How Private Equity Investing Works
Learning about private equity means knowing how to understand its operational mechanics, particularly the way funds work and how investors receive returns.
Fund structures: closed-end vs. semi-liquid
Private equity funds typically operate as closed-ended vehicles that raise fixed capital with a ten-year lifespan. These drawdown funds pull committed capital gradually when investment opportunities emerge. Semi-liquid funds work differently by offering quarterly liquidity through redemption gates and liquidity buffers. This newer model has become more popular, and the number of semi-liquid funds has nearly doubled to 520 with estimated assets of €333.97 billion.
The LP and GP relationship explained
The private equity world runs on partnerships between Limited Partners (LPs) who invest capital and General Partners (GPs) who handle investments. GPs make money through management fees (1-2% of fund capital) and carried interest (usually 20% of profits). They take care of fundraising, find deals, manage portfolios, and implement value-maximising strategies. LPs, which include pension funds and wealthy individuals, keep their liability limited to their original capital commitment.
Understanding the J-curve effect
Private equity investments show a distinct pattern – negative returns at first, followed by positive returns later, which creates a J-shaped curve. This happens because funds charge management fees before investments start generating returns. The performance turns positive when portfolio companies grow in value and sell profitably.
How returns are generated and distributed
Returns come from three main sources: higher earnings, paying down debt, and better exit multiples. A distribution waterfall splits profits across four tiers: return of capital, preferred return (usually 7-9%), catch-up tranche, and carried interest. American waterfalls distribute profits deal by deal, while European waterfalls focus on returning all investor capital first.
Step 4: Prepare to Invest in Private Equity
You should understand entry barriers, evaluation criteria, and risks associated with this asset class before heading over to private equity investing.
Minimum investment and accreditation requirements
Private equity demands large financial commitments. Direct fund investments typically range from €250,000 to €10 million. Some platforms now offer entry points as low as €50,000 through new structures. Most private investments need you to meet accreditation standards. These standards require either a net worth above €950,000 (excluding primary residence) or annual earnings over €190,842 (€286,263 with spouse) for the past two years.
How to get into private equity investing as an individual
Several paths exist for individual investors to enter private equity. Feeder funds combine capital from multiple investors to reach minimum thresholds. Investors seeking more liquidity can choose publicly traded options like PE firm stocks, listed investment trusts, and ETFs. Recent regulatory changes in Europe and America have made private equity available to more people. European structures like ELTIFs now allow retail investors to participate without minimum investment requirements.
Evaluating fund managers and strategies
Manager selection plays a vital role because performance gaps between top- and bottom-quartile managers have exceeded 2,100 basis points in the last decade. The core team’s capabilities, past performance, deal-sourcing abilities, and unrealised investments need careful evaluation. Look at sector focus, equity check size, geography, and lead professionals.
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Key risks: illiquidity, fees, vintage risk
Illiquidity remains a main concern, as investments lock up capital for 5–10 years without redemption rights. Fee structures can affect returns significantly. Management fees (1-2.5% annually), carried interest (typically 20% of profits above the hurdle rate), and fund expenses together might reduce returns by up to 200 basis points. Vintage risk occurs when investing in a single time period. Different vintage years have historically shown varied results.
Diversification and portfolio fit
Institutional investors invest 5–30% of their portfolios in private equity. Individual investors should start at 5–10% and grow over time. Family offices invest across eight different years to create a balanced allocation strategy. This approach helps alleviate timing risk, which matters because certain private market strategies show notable performance differences across vintages.
Conclusion
Private equity investing is a chance to broaden your investments beyond traditional stock markets. The private equity sector has consistently beaten public markets and provides access to a big investment universe that average investors haven’t yet explored.
Without doubt, entry barriers have dropped substantially. While big institutions and ultra-wealthy individuals While traditional private equity firms once ruled this space, new platforms now allow qualified investors to participate with just €50,000. This shift makes these profitable investments available to many more people.
Your success in private equity depends on several key factors. You need to learn about different private market strategies. Top fund managers deliver much better results than others, so assess them really well. These investments also require you to be comfortable with limited liquidity.
On top of that, it makes sense to start with 5-10% of your portfolio to learn and control risk. You can reduce timing risks by slowly raising your stake over multiple vintage years as your confidence grows.
The private equity sector keeps changing and creating new ways for individual investors to participate. You can build wealth through this alternative asset class by using feeder funds, publicly traded entities, or direct fund investments.
Private equity needs patience, diligence, and careful planning. The rewards – boosted returns, portfolio variety, and unique market opportunities – make them worth thinking about as part of your long-term strategy.