Private Equity: What It Is and Ways to Invest
Private equity is investment outside the public markets. It allows investors to own equity in private companies.
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What is private equity?
Private equity is ownership in one or more businesses that are not publicly listed on a stock exchange. People typically invest in private equity via private equity funds, which are pooled investments offered by private equity firms. Private equity funds allow groups of investors to combine their assets to invest.
At a basic level, private equity involves three parties:
The investors, who supply the capital.
The private companies, which receive the capital.
The private equity firms, which pool, manage and invest money from investors via a private equity fund.
Private equity investments are a way for investors and investment firms to diversify their portfolios and take on more risk in exchange for the potential to earn higher returns than what they might earn by investing in public companies.
» Is private equity right for you? A wealth advisor can help you decide
Can a normal person invest in private equity?
Due to the risk, complexity and relatively lower disclosure requirements, private equity funds are usually open only to accredited investors (meaning your net worth — alone or combined with a spouse — is over $1 million or your annual income was higher than $200,000 in each of the last two years) and qualified clients such as institutional investors, insurance companies, university endowments and pension funds .
Traditional private equity funds also have very high minimum investment requirements, potentially ranging from a few hundred thousand to several million dollars.
However, there are two ways regular investors can indirectly invest in private equity:
Private equity exchange-traded funds (ETFs). These investments offer exposure to publicly listed private equity companies (more on these below).
Their pension or insurance. Pension funds and insurers often invest in private equity, so people who have pensions or certain types of insurance might already be indirectly participating in the private equity markets.
You may be able to invest in private equity through a 401(k) one day. The Labor Department and federal regulators are evaluating whether to allow 401(k) plans to make private equity investments and other alternative asset investments available to plan participants.
» MORE: How hedge funds work
How private equity investing works
Private equity firms pool money from investors and then use the money to make various private equity investments.
When you put money into a private equity fund, you can think of yourself as a secondary investor, or in official terms, a limited partner.
You supply the capital that helps make the investment possible, but you aren’t responsible for managing the investment, making the necessary improvements or handling the eventual sale or public offering. That’s what the private equity firm does.
Limited partners have limited liability, meaning the maximum they can lose is the amount they invest in the fund.
After the fund makes its investments, it harvests the profits. This typically occurs five or more years after the investment. To do this, the fund may sell its equity investment to another company, another private equity fund or to the general public via an initial public offering (IPO).
The fund distributes the proceeds to the investors according to the terms of the partnership agreement. Typically, the firm takes about 20% of the profits and splits the rest among the limited partners based on how much they contributed to the fund.
» MORE: How to become an angel investor
Diversification.
Potentially high returns.
Risk.
Long time horizon.
Lower disclosure requirements.
Advantages of private equity
Diversification
Investors often turn to private equity to diversify their holdings. Diversification is an investment strategy that entails buying different types of investments to reduce the risk of market volatility.
Potential for high returns
Private equity investments can provide returns that are higher than what the public market might provide. However, those gains might also never materialize or may only materialize after a long time, so it's important to understand how much risk you can tolerate.
Risks of private equity
Illiquidity
To see a return on a private equity investment, you may have to hold it for as long as 10 years. Private equity funds work differently than more common fund types (such as mutual funds) in that limited partners typically must commit a set amount of money that the PE firm can use as needed within a specified period.
When the PE firm requests money from investors, it’s known as a capital call. For example, a private equity firm may make various investments over a five-year period, calling on its limited partners for capital during that time. Then, once the firm has identified investments in target companies and raised the needed capital, it still needs to make improvements to the companies or spur growth before selling them.
Compared with other types of investments that can be easily converted into cash, such as stocks, the combination of capital call investment periods and the time it takes to sell a target company makes private equity highly illiquid.
Transparency, regulation and data
Private equity funds aren't registered with the Securities and Exchange Commission, so they aren’t required to publicly disclose information about their funds (unlike, say, a mutual fund, which is subject to public disclosure requirements).
Moreover, privately held companies — often the targets of private-equity acquisitions — aren’t subject to certain financial disclosure regulations. It’s up to the private equity firm to identify healthy companies. This leads to varying risk levels within the private equity universe: Mature companies may have years of earnings and operations data, while early stage startups may have very little of this information.
» MORE: What is private credit?
How to invest in private equity
Research top private equity firms
Private equity firms have their own investment minimums, areas of expertise, fundraising schedules and exit strategies, so you’ll need to do research to find one that’s right for you. Also, private equity funds are usually open only to accredited investors.
Here are the 10 largest private equity firms in the world in 2025, based on how much capital they raised in the last five years.
KKR
EQT
Blackstone
Thoma Bravo
TPG
CVC Capital Partners
Hg
Hellman & Friedman
Clayton, Dubilier & Rice
Insight Partners
Private equity exchange-traded funds
An exchange-traded fund (ETF) is a basket of investments in assets such as stocks or bonds. The ETF provider owns the underlying assets, designs a fund to track their performance, and then sells shares in that fund to investors. Shareholders own a portion of the ETF; they don’t own the underlying assets in the fund.
Private equity ETFs invest in publicly listed private equity companies, meaning they invest in companies that invest in private equity. This approach is a way to make private equity accessible to those who aren’t accredited investors or who can’t meet the minimum investments required by private equity funds.
Types of private equity investments
Private equity firms make two common types of investments.
Buyouts
A buyout occurs when a private equity firm buys a target company with the hope of selling it later at a profit. That target company can be public or private (if it’s public, it will be taken private through the purchase).
In a buyout, the private equity firm might identify a company with room for improvement, buy it, make improvements to its operations or management (or help the company grow), then turn around and sell the company for a profit, known as an “exit.”
Often, private equity firms use capital from the fund as well as borrowed money to complete the deal, using the target company’s assets to secure the loan. When borrowed money is involved, the deal is known as a leveraged buyout.
Venture capital
Buyouts invest in established companies; venture capital invests in early stage startups looking to raise cash in exchange for equity in the company. The goal here is to invest in companies with high growth potential that can either be sold at a later date or taken public through an initial public offering (IPO). After an IPO, the PE firm sells its ownership stake for a profit.
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