How to invest in private equity for the entry level investor

Private equity, the capital made available to private companies or investors, is usually an attractive investment opportunity for institutional investors and wealthy individuals.

That’s because, by investing in private equity, their money goes into pools that represent a source of funding for early-stage, high-risk ventures and plays a major role in the economy. Private equity typically goes into new companies who show signs of significant growth possibilities; companies such as FedEx, Intel and Cisco Systems have all received private-equity funding over the years.

However, traditionally unless you’re willing to put up £200,000 or more, your choices in investing in the high-stakes world of private equity are very limited, but there are still ways. We’ll show you how you can invest in private equity.

Private equity landscape chart

Funds of Funds

Since most private-equity investing is not easily accessible for the average investor, there are some partnerships available that can help you invest in private equity without having to put in a minimum of £200,000. One such type of partnership available is a fund of funds, which holds the shares of many private partnerships that invest in private equity.

Funds of funds provides a way for firms to increase cost effectiveness and thereby reduce their minimum investment requirement. This can mean greater diversification, since a fund of funds might invest in hundreds of companies representing many difference phases of venture capital and industry sectors. Additionally, due to its size and diversification, a fund of funds has the potential to offer less risk than you might experience with an individual private-equity investment.

However, the disadvantage of a funds of funds approach is that there is an additional layer of fees that need to be paid to the fund of funds manager. Make sure you do your research to see what requirements are in store for any funds of funds partnership you want to join.

Private-Equity ETF

Another alternative is that your can purchase shares of an exchange –traded fund (or ETF) that tracks an index of publicly traded companies which invest in private equities. Since you’re buying individual shares over the stock exchange, you don’t have to worry about any minimum investment requirements.

A drawback of the private equity ETF is that, like a fund of funds, an ETF will add an extra layer of management expenses that you might not encounter with a direct, private-equity investment. Also, depending on your brokerage, each time you buy or sell shares, you might have to pay a brokerage fee.

Special-Purpose Acquisition Companies (SPAC)

Lastly, you also have the option of investing in publicly traded shell companies that make private-equity investments in undervalued private companies. But these can be risky. The problem with SPACs is that they might only invest in one company, which won’t provide much diversification. Additionally, they might also be under pressure to meet an investment deadline as outlined in their IPO statement. This could make them take on an investment without giving it the proper thorough due diligence.

All-in-all, private equity investing is an attractive option, but it can also be an expensive and risky one. As mentioned earlier, the fees of private-equity investments that cater to smaller investors can be higher than those you would normally find with conventional investments, such as mutual funds. This can have the possibility of reducing returns.

Boutique Private Equity firms

Today we also find an increase in boutique firms such as Caban Capital where investors can get involved from around £10 000. The money is pooled and is normally invested in focused areas such as renewable energy, technology or other highly profitable areas. To make investments more accessible to investors, private equity firms may also list the fund publicly on Nasdaq or the London Stock exchange for instance. This then allows investors to exit investments when they see fit, making investments even more accessible and in many ways reducing the risk, although there will of course always be a relative risk when buying or owning shares in a publicly listed company if you don’t remain in touch with your investment.