Private equity investing

A breakdown of the structure, strategy and risks behind private equity investing

What is private equity?

Private equity is a category within private markets, alongside assets like private credit, real estate and venture capital. It involves investing directly in private companies or participating in buyouts of public companies that are taken private.

Unlike public equities, private equity investments are not traded daily. Instead, capital is committed for a period of years while the investment is developed and eventually exited. As such, these investments are typically made with a long-term perspective because value is built actively over time, rather than as a result of shorter-term market movements.

Private equity sits within the broader alternative investments landscape and is typically associated with longer investment horizons and less liquidity than traditional stocks and bonds.

Key terms to know

Limited Partner (LP)

The investor providing capital to a private equity fund

Sponsor/General Partner (GP)

The firm or individual responsible for managing a private equity fund, making investment decisions, and guiding portfolio companies through to exit

Capital commitment

The total amount an investor agrees to contribute to a fund, drawn down over time as the manager identifies and closes investments

Exit

The event through which an investor realizes returns, commonly through a company sale, merger, or initial public offering

private equity

Private equity investors aim to increase the value of a business over time through a combination of strategic and operational initiatives. Common value creation levers include:

Operational improvements

Streamlining processes, reducing costs an improving efficincy

Revenue growth

Expanding sales channels, enhancing pricing strategies or improving customer acquisition

New products or services

Investing in innovation to unlock new markets or deepen existing ones

Geographic expansion

Entering new regions to scale the business footprint

Strategic repositioning

Refining the company’s focus, leadership or capital structure

The goal is to exit the investment at a higher valuation than the original entry point, reflecting the progress made during the holding period.

Common private equity strategies and key features

Private equity funds

Private equity investments are often accessed through pooled investment vehicles, or funds, where a fund manager selects and deploys capital across a basket of privately held companies. This approach can offer diversification in aspects like sector, size or stage of the company, but manager selection can have an impact on outcomes.

Hold period

Often ranges from 5 to 10+ years

Potential benefit

Risk spread across multiple companies

Distributions

Returns are realized as underlying investments are sold

Manager role

The sponsor actively guides strategy, operations and exit timing

Pre-ipo Investing

Another emerging strategy is investing in pre-IPO opportunities. Pre-IPO investing means funding companies that are nearing launch on a public exchange like the New York Stock Exchange or Nasdaq. This strategy can give investors access to growth prior to companies experiencing the pricing adjustments and volatility that can come with an IPO.

Learn more about pre-IPO investing

Hold period

Often ranges from 18 months to 5+ years

Potential benefit

Access to companies that are typically well-developed, but still private

Distributions

Returns are realized when the company goes public or shares are sold as secondaries

Due-diligence

Investment decision is in the hands of the investor, so company due diligence is critical

Both private equity funds and pre-IPO investments involve a similar investment process:

01

Investors source opportunities through platforms, intermediaries or existing fund investors

02

Investors evaluate the structure of the deal and conduct due diligence on the company or fund manager

03

Investors commit capital

04

Capital is deployed for use to the company, or across multiple companies via a fund

Risk considerations

Private equity involves a distinct set of risks that differ from public market investments:

Illiquidity

Capital is typically locked up for extended periods with limited ability to exit early

Valuation uncertainty

Private companies are not priced daily, and valuations rely on periodic assessments

Concentration risk

Funds may hold a relatively small number of investments compared to public portfolios

Manager execution risk

Outcomes depend heavily on the sponsor's ability to execute strategy and improve operations

Structural and regulatory complexity

Investment terms, fee structures, and reporting and be more complex than traditional assets

These factors make due diligence and a clear understanding of the investment structure especially important.

Time horizon and liquidity

Private equity is generally suited for long-term investors.

Typical duration

5–10+ years from initial investment to final exit

Liquidity constraints

Limited ability to redeem or sell positions during the life of the investment

Secondary markets

May exist but are often less liquid and may involve pricing discounts

Exit events

Include acquisitions, mergers, or initial public offerings (IPOs)

How private equity may fit into a portfolio

Private equity can play a complementary role within a diversified portfolio, depending on an investor’s goals and time horizon.

Diversification

Exposure to companies and opportunities not available in public markets

Growth orientation

Typically focused on long-term capital appreciation rather than income

Correlation

Returns may be less tied to short-term public market movements, though still influenced by broader economic conditions

Planning alignment

Often better suited for capital that is not needed for near-term expenses

How to invest in private equity

These are some of the most common vehicles for accessing private equity investment opportunities:

Self-directed IRAs (SDIRAs):

SDIRAs are specialized IRAs that allow for investment beyond traditional stocks and bonds. They follow the same tax treatment, eligibility criteria and contribution caps as standard IRAs, but are able to hold alternative assets like private equity, private credit and venture capital. Since retirement accounts are designed for long-term growth, they provide alignment with the longer timelines of private market investments.

Feeder fund and fund platforms

These vehicles reduce investment minimums and allow access to specific private equity opportunities that might otherwise be inaccessible. They serve as a single fund to feed investments for institutional or high-net-worth investors. Through fund platforms, investors can typically participate in private equity offerings.

Special purpose vehicles

A special purpose vehicle is a legal entity created for the purpose of pooling investor capital into a single investment. In private equity, SPVs are commonly used to give multiple investors coordinated access to a specific deal or company, often with shared terms and a single entry point into the cap table. Like other private equity structures, SPVs are illiquid by nature and typically involve a defined hold period tied to the underlying investment. They follow the same SDIRA eligibility rules as other alternative assets, meaning they can be held within a self-directed IRA subject to applicable IRS guidelines. Please note that when holding an SPV inside of an SDIRA, investors should ask their custodian or a tax advisor if the investment structure could generate UBIT or UDFI.