How to Invest in Private Equity – A Guide for Retail Investors

Like many other investors, you have likely been attracted to alternative asset classes such as private equity due to the performance many funds have been able to provide over the previous decades.

However, these returns have largely gone to high net-worth individuals, pension funds, and sovereign wealth funds, as they have traditionally been the only ones who can invest.

There are now opportunities for select accredited investors to invest directly into private equity funds, or even directly into one of the businesses that private equity sponsors are investing in.

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What Is Private Equity?

Private equity refers to investment in privately held (not traded on the stock exchange) companies or other assets. Private equity firms raise capital from investors to purchase or invest in these private companies. Oftentimes these companies are being purchased from a retiring founder or previous owner-operator.

These private equity firms typically acquire a controlling or significant stake in a company, often with the intention of improving its operations, increasing its value, and eventually selling it for a profit.

Private equity investments can take various forms, including buyouts of mature, cash-flowing companies. Or growth capital, where capital is injected into a growing business to further invest in its growth. 

Private equity firms typically hold their investments for 4-6 years and in some cases much longer. During this period they actively work with management to implement strategies aimed at driving growth and improving profitability. The ultimate goal is to exit the investment through a sale once the company has executed its growth plan.

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Interested in learning more about how Private Equity investors drive returns for their investors? Have a look at our Roll-up and leveraged buyout articles.

General Partners and Limited Partners - The Key Players In Private Equity

In private equity, general partners (GPs) take charge of managing the fund’s operations. They find deal opportunities and make investment decisions, offer strategic guidance to the companies that they invest in, oversee management teams, and often-times contribute their capital to the fund. 

On the other hand, limited partners (LPs) are investors who provide capital to the fund. They don’t participate in the fund’s day-to-day management or operations.

Limited partners have limited liability, meaning their financial risk is capped at the amount they’ve invested. In return for their capital, limited partners receive a proportional share of the profits generated by the private equity firm’s investments.

PE Fund Investing Vs. PE Deal Investing

Private equity investments are made in one of two ways, by investing into a fund where the private equity firm has discretion on what companies to invest into. Or, by investing on a deal-by-deal basis where the private equity firm finds an investment opportunity that they believe in and then offers the opportunity to investors to participate.

Fund Investing

The private equity fund model is most typically invested in by larger limited partners such as pension funds and sovereign wealth funds. While they have less control over which deals they are investing into, the trade off is that this allows the investors to allocate larger portions of capital into these investments than they would if they were funding the opportunities of a deal-by-deal basis.

Additionally, raising these committed funds is the chosen path of major private equity firms such as Blackstone, Apollo, KKR, and Carlisle Group. This allows them to have discretion over the capital once it is raised and not have to fundraise on a deal-by-deal basis.

Deal-by-deal Investing

Investing on a deal-by-deal basis has been an increasingly common private equity structure over the past decade. This allows the limited partner (investor) to have discretion on whether to invest in a given opportunity on a deal-by-deal basis as opposed to putting the capital into a blind pool fund.

While this allows the investor to have more control on where their capital goes, it is an inefficient way to allocate large sums of money (billions) and therefore is not typically utilized by large pension funds, sovereign wealth funds, etc.

Private Equity, Growth Equity, and Venture Capital - An Overview

Private Equity Investments

Private equity investments aim to acquire ownership stakes in established companies from their current owners. These investments typically occur in mature businesses with stable revenue streams, where private equity firms often acquire a controlling stake.

Once the private investment has been made, the aim is to drive growth through strategic initiatives such as restructuring, operational improvements, strategic acquisitions or expansions into new markets.

Growth Equity Investments

Growth equity investments, on the other hand, support mature companies seeking capital to accelerate their growth trajectory. These companies often have proven business models and positive cash flows but require additional capital for growth opportunities such as acquisition or research and development.

Unlike private equity, growth equity investments typically do not involve a majority stake acquisition, allowing existing management to maintain control while accessing the necessary capital for expansion.

Venture Capital Investments

Venture capital investments focus on early-stage startups with high growth potential but higher risk. Venture capitalists provide funding to these companies in exchange for equity, often at an early stage when the company has yet to generate significant revenue or profit. 

Are Private Equity Investments Liquid?

Generally speaking, private equity investments are not liquid. Once you invest in a private equity fund or a private equity deal, the capital is tied up until the end of the funds life cycle (typically 7-10 years) or when the deal is sold (typically 4-6 years).

In recent years there has been a growth in a secondary market for the limited partner interest in private equity funds.

The aim of a secondary market is to allow limited partners to sell their investments in a fund to another investor before that fund closes and returns capital to its investors. However, this market is still in its infancy and secondary market options are primarily available only to large limited partners with $100M+ in any given fund.

Do You Have to Manage the Business That You Invest In?

No. Limited partners (investors) are not responsible for the deal sourcing, evaluation, operations or oversight. It is the General Partners job to deploy the Limited Partners money into businesses and then oversee the growth of those investments and return the proceeds to the limited partners, minus their fees.

How Do PE Firms Charge?

Private equity firms get paid in three main ways…

Closing Fees

It is common for private equity sponsors to take a fee out of capital that has been raised from limited partners at the time the fund or investment fundraise closes. These fees are also occasionally taken upon the close of a portfolio company.

This fee is used to cover the expenses related to a capital raise such as hiring a placement agent, legal expenses, fund administration etc.

Management Fees

Firms charge investors annual fees, typically a percentage of total capital commitments or a percentage of portfolio company EBITDA. These expenses are typically used to cover operational expenses of the private equity firm, such as salaries, accounting, legal, marketing, travel, etc.

Performance Fees (carried interest)

The primary way that private equity firms get paid is a performance fee based on how successful they are at growing their investors’ (limited partners) capital. This carried interest (also called “carry” or “promote”) is a percentage of the growth of the investment. 

For instance, if a private equity firm raises $20M in equity capital from investors and turns it into $80M, it would make a percentage of the $60M in growth that it created for its investors.

What To Look For in a Private Equity Investment

When considering a private equity investment, retail investors should prioritize certain factors. First, assess your risk tolerance as private equity typically involves higher risks and longer investment horizons and can be more volatile that some other investment vehicles such as publicly traded bonds and some stocks.

Next, learn about the private equity firm or manager to gauge their ability to generate investment returns and manage risks effectively. What is their experience in private market investments and transactions? Do they have other applicable experience such as educational background or entrepreneurship that could aid in their ability to drive investment returns? It is important to understand the investment strategy of the contemplated deal or fund and ensure it aligns with your investment objectives.

It is also wise to make sure that there are checks in balances in place (such as a fund administrator) to provide third-party oversight of your investment.

Prospective investors will also want to consider diversification across your complete investment portfolio to mitigate risks. You may not want too much of your net worth to be allocated into a single asset class, especially if you are a newcomer to private market investing.

Lastly, evaluate the potential exit options to understand how and when you may realize returns. It is common for private equity deals and funds to lock capital up for 4+ years. 

How Do Private Equity Firms Grow the Companies That They Invest In?

There are several ways that private equity firms seek to drive returns for their investors. The most common of which are:

Roll-up Strategy

A roll-up strategy, also known as an industry consolidation strategy is when the private equity firm acquires a platform investment, which is typically a strong business typically generating $4M+ in EBITDA in a given industry. They then acquire several smaller businesses in the same industry, known as bolt-on investments and combine them with the larger platform company.

This strategy adds value in a number of ways. First, it cuts costs by centralizing key business functions such as accounting, HR, marketing, etc.

Next, it is a way to leverage one, strong marketing team of the platform company and allow them to have oversight over more people and revenue. Assuming these executives are better at what they do than the previous leaders of the small, bolt-on companies, then the platform benefits.

Lastly, the company benefits from valuation arbitrage by moving up-market. In essence, it is combining several small companies, each worth ~3X EBITDA, and making one larger company, likely worth ~6X.

Buy-and-build Strategy

Another one of the common growth tactics in private equity investing is to execute on what is known as a buy-and-build strategy. In utilizing this strategy, a private equity firm will buy a platform business in a given sector and then acquire adjacent companies that complement the main business. These secondary companies could offer an adjacent product or service, or they could be a supplier or even a customer of the main business.

Similar to the roll-up strategy, the goal is to cut costs through consolidation, leverage one strong management team, and move up-market to sell for a higher valuation relative to the business’s profitability.

Financial Engineering

Financial engineering in the context of private equity generally means that the private equity firm finds a way to change payment terms or recapitalize a business that they are making a private investment into. This recapitalization could come in the form of a dividend recapitalization, leveraged buyout

In addition to finding strong businesses at fair prices to invest into, it is common for private equity investors to finance a portion of their acquisitions with debt capital. This way, they can decrease the amount of equity that is needed to buy a business.

When an acquisition is financed primarily with debt (either from a bank or non-bank lender) the ensuing acquisition is commonly referred to as a leveraged buy-out (LBO). One of the main reasons that limited partners opt to invest in private equity is this ability to finance investments with more debt than can typically be utilized with public market investments.

Investments in private companies can also benefit from the creditworthiness and strong financial acumen of the private equity investor. The investment firm typically has greater resources and can get loans from banks on more favorable terms for the company than they would have been able to get on their own.

Sector Specific Expertise

A commonly practiced way to invest by emerging managers and small private-equity firms, it has become common to have firms or teams within large firms that focus on a certain industry. For instance, some healthcare-specific investors bring in operating partners who are medical doctors to advise them of the efficacy of given investment opportunities.

Furthermore, they will educate themselves thoroughly in that industry, attend conferences, network with executive teams, and ultimately feel as though their investments will outperform their peers by having this inch-wide, mile-deep focus.

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What Type of Returns Should You Expect When Investing in Private Equity?

Investing in private equity should yield higher returns than investing in public market vehicles, such as stocks, bonds, ETFs and mutual funds.

Most private equity firms target expected return rates (IRR) of 16% – 30% after fees. While this may seem like a no-brainer to invest in private equity, the trade off is that these investments involve greater risks due to their illiquidity and longer investment horizons.

Returns vary based on factors such as investment stage, industry conditions, economic climate, and size of investment.

Smaller investment funds and private equity sponsored deals have historically provided for higher returns than traditional middle-market ($10M – $100M EBITDA) private equity investments.

These investors focusing on smaller companies (under $100M enterprise value) have many more potential investment targets than larger investment firms. Additionally, companies in this size range typically trade at lower multiples than larger companies.


All the finance, investing and private equity terms you need…


In the context of private equity investing, arbitrage is when a business is bought and sold at a different valuation multiple (ideally a higher one).

Blind Pool:

A fund comprising portfolio companies whose selection is yet to be determined at the time of fundraising.


A company that is relatively small that is acquired and integrated with a larger business, called a platform company.

Buyout Fund:

A fund primarily focused on acquiring majority stakes in established companies with steady returns and cash flow.

Capital Call:

Private equity funds for institutional investors often do not require full payment of subscribed capital upon admission; instead, funds are called down in multiple tranches as needed during the Commitment Period to make investments and cover expenses.

Carried Interest:

Carried interest refers to the disproportionate profit share earned by the fund manager in the success of the managed fund. It is typically around 20% of profits and exceeds the manager’s capital investment, often paid to a Carry Vehicle.

Enterprise Value:

Enterprise value is the measure of a company’s value. The calculation for this is equity value minus net cash.

Fund Administrator 

Fund administrators provide financial reporting and accounting services for the fund. Many private equity sponsors will elect to hire a third-party fund administrator. The main benefit of this is that it provides third-party oversight of how the capital is invested.


The process of raising funds from investors for a newly established fund, concluding with the Final Closing.

General Partner (GP):

A limited partner, also called a sponsor or deal sponsor is the individual or company that is leading an investment deal or fund. It is the General partner’s responsibility to raise capital from limited partners, invest that capital, and return it to the limited partner with further returns.

Internal Rate of Return (IRR):

IRR is the annualized implied discount rate derived from a series of cash flows, commonly used to evaluate the performance of private equity funds due to their investment and divestment activities over time.

Investment Strategy:

The defined approach (e.g., buyout or venture capital) outlined in a fund’s documentation (e.g., fund agreement, prospectus) dictating how raised capital will be invested in line with investment objectives, risks, and timeframes.

Limited Partner (LP):

An investor in funds structured as partnerships, enjoying limited liability.

Management Fee:

A predetermined fee is paid for the management services provided by General Partners (private equity firm).


A segment of the economy broadly thought of as being between $10M – $100M in EBITDA. Furthermore, companies from $2M – $20M are typically referred to as being in the lower middle-market.

Multiple on Invested Capital (MOIC):

MOIC measures the value or performance of a private equity investment relative to its initial cost, calculated as the ratio of total returns to invested capital, irrespective of time.

Platform Company:

A company with relatively large size (for most firms this is $4M EBITDA and up) that is acquired and subsequently grown by acquiring smaller businesses (called bolt-ons) to attach to it.

Portfolio Company:

A portfolio company is a company that has been invested in by the private equity sponsor

Private Markets:

Investments in debt or equity instruments not traded on public exchanges, comprising Private Debt and Private Equity components.

Private Placement Memorandum (PPM):

A comprehensive document summarizing key information about a fund investment, including its category, objectives, risks, investment strategy, fund manager, risk management, and legal and tax considerations.


A recapitalization is changing the mix of equity and debt in a business. This often-times takes the form of a company taking on debt in order to buy-out a previous investor’s equity.


A deal sponsor is synonymous with a General Partner. This is the person or firm that is responsible for selecting, evaluating and providing oversight to the company that is being invested in.