Private equity, or capital investments made in private enterprises, is a growing alternative investment option for investors wishing to diversify their portfolios.
Private equity deal volume increased approximately 22 percent year on year in the first five months of 2021 alone, resulting in over 2,300 agreements.
With a track record of frequently outperforming the public market and a current rising trend, it’s no surprise that many individual investors are anxious to get started in the private equity area. Here’s an overview of what it takes to become an individual private equity investor.
Understand Alternative Investment Terms
It is critical to comprehend the vocabulary and field of alternative investments before entering into private equity investment. Alternative investments include anything other than stocks, bonds, and cash. Private equity is one of the several techniques that comprise the asset class of alternative investments.
Become a Certified Investor
After you’ve gained a solid understanding of the sector, the next stage is to become an accredited investor. Many investing industries, including private equity, hedge funds, and various forms of real estate, require this certification.
According to the United States Securities and Exchange Commission (SEC), to be deemed an accredited investor, you must either:
- Earned more than $200,000 (or $300,000 with a spouse) in the previous two years, with a reasonable probability of earning the same in the current year
- Have a net worth of more than $1 million, either alone or with a couple (excluding the value of a primary residence).
If you do not meet these certification standards, you can still invest in other industries that do not require accreditation. Typically, they are standard assets such as stocks, bonds, and publicly traded real estate.
The SEC requires private equity accreditation due to the uncontrolled nature of alternative investing. Because investments are unregulated, private equity firms want a mechanism to be relatively confident that investors will remain financially stable if their investments fail.
Determine whether or not you fit into this category; if so, be prepared to disclose financial statements with the firm you want to invest with in order to verify your net worth or income.
Find and Hire a Private Equity Firm
The following phase in the investment process is to look for and choose a private equity firm. Because the firm’s managers will deploy your investment funds and control investment decisions, it’s critical to choose the one you can trust.
While many private equity companies invest across strategy and sector, they can also operate at the intersections of niches. Based on your personal experience and industry trends, consider your preferences. For example, if you’re a seasoned tech entrepreneur, you can decide to look into venture capital organizations that specialize in technology.
When investigating a firm’s previous investments and the returns it has generated for limited partners in the past, use caution. Most corporations disclose information about the companies in their portfolios as well as their overall investment strategy. Read whatever resources a company provides on its strategy, including corporate social responsibility reports, which can provide information about the companies it invests in and their impact on the environment and community.
Another crucial consideration is a company’s minimum investment requirement. Historically, the minimum private equity investment size has been $25 million. However, in order to attract a broader investment base, some corporations have recently deviated from this high barrier. The minimum required varies per company; some require as little as $25,000. Make this a priority in your research to ensure that your investment is a good fit for the firm you choose.
You’ll need connections in the field to get started once you’ve chosen a firm that suits your investing constraints and interests. Because of their extensive network of investing contacts, many high-net-worth individuals use family offices (privately held corporations that handle investments for wealthy individuals) or financial advisors.
Monitor Industry Developments
After you’ve chosen a private equity firm, validated your accreditation, and made your investment, the firm’s managers will oversee the investment. Although you won’t see a return on your investment for years, you may keep an eye on industry trends to evaluate how your investment is progressing. Keep an eye on changes in the industries of the companies receiving your investment, the private equity area, and the alternative investments industry as a whole.