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How to Invest in Private Equity and Whether You Should

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Aug. 13 2021, Published 2:20 p.m. ET

The vast majority of investing is done within the public market—the stock market. However, some of the best investment opportunities can be found outside of the public market. The private market includes alternative investments like private equity, private lending, venture capital, and private real estate. Private equity is a growing sector of the investment landscape and activity in private equity has been heating up. However, the private market isn't as accessible. So, how can everyday investors tap into private equity and capitalize from it?

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What is private equity?

Private equity is ownership in an entity that isn't publicly listed or traded. Private equity is a form of investment capital that usually comes from high-net-worth individuals and firms that purchase equity stakes in private companies. These investors can also purchase control of publicly traded companies and take them private and off the stock exchanges.

The private market is comprised of institutional investors like pension funds and brokerages as well as large private equity firms funded by established investors. Because private equity requires significant capital, most of the market is controlled by investors with deep pockets.

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High net worth and institutional investors gravitate towards private equity investments. These funds become essential capital for early-stage, high-risk start-ups and can help boost the economy in a specific sector. This can also include pension plans, large university endowments, and small family practices.

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Private equity funds often go into new companies poised to have significant growth in emerging industries like telecommunications, tech, and biotechnology. The goal is to generate returns for the private equity firm and add value to the companies they invest in. Sometimes a private equity firm will bring in a new executive team, merge other companies within their control, and downsize areas of the company that aren’t performing.

How do you get into investing in private equity?

Unfortunately, private equity isn't easily accessible for everyday investors. Many private equity firms keep their eyes on investors who are willing to invest millions of dollars. Unfortunately, private equity isn't easily accessible for everyday investors. While still outside of many investors' pocketbooks, some firms have dropped their minimums to $250,000. So, how can the average Joe get his hands into the private equity game?

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One way is to invest in ETFs that track an index of publicly traded companies investing in private equities. By buying individual shares of an ETF, there aren’t any minimums to worry about—and many brokerages allow fractional shares making the barrier to entry much lower. However, ETFs will add an extra layer of management fees by way of expense ratios not existent with traditional private equity investments.

Another way to invest in private equity is through publicly traded SPACs that make private equity investments. One drawback is a SPAC might only own equity in one private company limiting any diversification.

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