How to Invest in Private Equity

Explore this Article

methods

1Buying Exchange-Traded Fund (ETF) Shares

2Investing in a Fund of Funds

3Using a Special Purpose Acquisition Company (SPAC)

Other Sections

Tips and Warnings

Related Articles

References

Private equity is a way for individual businesses with high growth potential to expand and become more profitable. Because private equity firms typically set their minimum investment at $25 million or more, private equity investments have traditionally been out of reach to the average investor. However, there are a few investment vehicles that smaller investors can use to diversify their portfolios with private equity investments.

Steps

Method 1

Method 1 of 3:

Buying Exchange-Traded Fund (ETF) Shares

1. 
   1
   Open a brokerage account if you don't already have one. ETF shares are traded just like stocks. Using an online broker is the easiest way to buy ETF shares.

   • If you don't already have a brokerage account, you may want to research ETFs before you settle on a broker. That way you can make sure you choose a broker who has shares available in the ETF you're interested in. Some smaller brokers may have limited ETF offerings.
   • With most online brokers, you can open and fund an account in just a few minutes. You'll need to provide your Social Security or other tax ID number and government-issued identification, such as a driver's license or a passport. Most applications also will ask for employment and financial information, as well as a summary of your investment goals.
2. 
   2
   Compare ETFs available through your broker. Your broker will have different ETFs available. Each ETF tracks a different index. To compare, look at what index the ETF tracks, how the fund is constructed, and how long it's been established.

   • Some ETF creators have invented their own indexes that track a specific segment of the stock market. If you're a beginning investor, stick with an ETF that tracks an established index, such as the S&P 500.
   • Review each ETF's expense ratio to determine how much the investment will cost you. Commissions aren't included in the expense ratio as they vary greatly among brokers. You can get this information from your brokerage firm.
   Advertisement
3. 
   3
   Place an order for shares online. For most online brokers, you'll place an order for ETF shares using the same form you would use to place orders for shares of stock. Log into your account and look for a "trade" option to get started.

   • Typically you'll identify your account and then enter the ticker symbol of the ETF you want and the number of shares of that ETF you want to purchase.
   • With many online brokers, you can get more information about the ETF directly from the trade screen. However, this information will likely be limited to a quote or brief summary. Research more thoroughly before you get to this point.
4. 
   4
   Check your order before you submit it to your broker. Once you place your order, you'll typically be taken to a screen that allows you to verify that the information you've submitted is correct. Especially if you're placing your order using a mobile app, make sure you've entered the information correctly to get the ETF and number of shares you want.

   • Most online brokers will also send you an email confirmation of your order. If you notice a mistake on your confirmation, contact your online broker through their customer service number to make any corrections.
5. 
   5
   Check your ETF's performance periodically. ETFs are meant to be longer-term investments, so you don't need to check it every day, or even every week, to see how it's doing. However, it's a good idea to check at least once a quarter.

   • If your investment is losing money, look at the overall market and read financial reports and articles about the index your ETF is tracking. These can give you more information on whether you should stick with the ETF over the long term, or cut your losses and trade your shares.
   Advertisement

Method 2

Method 2 of 3:

Investing in a Fund of Funds

1. 
   1
   Review your personal investment goals. A fund of funds (FOF) gives you more diversity than a traditional mutual fund. You also get the benefit of multiple money managers to protect your investment decisions. However, different FOFs have different levels of risk, and may not be in line with your investment strategy.

   • As with any investment, higher returns typically entail higher risks. While you typically only want to have a small portion of your portfolio (2 to 5 percent) in FOFs, invest less if the risk is higher.
   • FOFs generally are intended to be longer-term investment vehicles. If you are a short-term investor, you may not realize enough gains to overcome your costs in management and performance fees.
2. 
   2
   Choose a fund broker. While you may already have an investment account with an online broker, you may want to use a different broker to invest in an FOF. You may be able to save some money in fees if you buy directly from the company that created the fund.

   • Some brokers have no account minimum, while others require you to make a minimum investment of $500 to $1,000.
   • Many firms that create FOFs offer shares in those funds with no transaction fees. If you purchased using your investment account with another online broker, you'd likely have to pay transaction fees for each purpose.
3. 
   3
   Evaluate cost and performance carefully. When you buy FOF shares, you pay two tiers of fees. There will be fees associated with the FOF itself, as well as the fees associated with each of the funds in that FOF.

   • Venture-capital private-equity FOFs are more likely to be worth the cost than other types of FOFs. They also typically offer more diversification than other FOFs by including more individual funds.
   • With FOFs, a greater diversity of funds within the FOF typically results in better returns for investors.
4. 
   4
   Choose a fund from your broker's offerings. Once you've identified the FOF you want, you can purchase shares from your broker the same way you would purchase shares in an individual mutual fund.

   • Many online brokers also have "supermarkets" where you can purchase shares in funds provided by a different broker. If you use a supermarket, pay close attention to fees. Your online broker may charge additional transaction fees or commissions on top of the mutual fund fees (which are already higher for FOFs). If the transaction fees are higher, consider opening an account with the fund provider and investing directly.
5. 
   5
   Rebalance your funds each year. The purpose of having mutual funds, including FOFs, in your portfolio is to diversity your holdings. Each year, evaluate the performance of the funds you hold and trade shares of underperforming funds.

   • Particularly if you have several mutual funds or FOFs in your portfolio, you may find that some outperform others each year. Depending on the amount you have invested, this may upset your diversification strategy.
   Advertisement

Method 3

Method 3 of 3:

Using a Special Purpose Acquisition Company (SPAC)

1. 
   1
   Research SPACs carefully before investing. A SPAC is essentially a shell company that does not yet have any assets. SPACs are created to merge or purchase one or more other companies. The potential value of an SPAC depends on the experience and reputations of the people who organized the SPAC.

   • Look up the individuals in the management team and review their backgrounds. Collectively, they should all have records of success in identifying growing businesses and taking those businesses public.
   • If the SPAC is focused on a particular industry, such as the tech industry, managers should have experience working with businesses in that particular industry.
2. 
   2
   Review your broker's eligibility requirements for IPOs. If you decide to invest in an SPAC, you'll typically get the best price for shares if you get in on the ground floor. Each brokerage firm has asset, trade, and relationship criteria you must meet to be eligible to participate in an IPO.

   • Typically, you must have at least $100,000 in assets to participate in IPOs. Some investment banks that sponsor IPOs require participating investors to have as much as $500,000 in assets.
   • Apart from sponsor requirements, brokerage firms may require you to have a specific type of account, or have completed a certain number of trades in a 12-month period.
   • Your broker also likely requires you to have a minimum amount of cash in your account. IPO shares must be bought with cash or available credit.
3. 
   3
   Sign up for IPO alerts with your broker. If you meet the eligibility criteria for the IPO, find out if your broker has IPO alerts. These alerts will let you know when the first shares have become available. Your broker also likely has a calendar you can use to plan your investments if you want to participate in an upcoming IPO.

   • If you've researched a particular SPAC that you're interested in, call your broker's customer service number and find out if your broker is participating in the SPAC's IPO. If they aren't, you may want to open an account with a different broker so you can participate. You can also wait and purchase shares on the secondary market a few weeks after the IPO.
4. 
   4
   Settle your purchase of IPO shares. Many IPOs are over-subscribed. Once shares are allocated, your broker will send you a notification of the number of shares you've been allocated. The cash will be withdrawn from your account to complete the purchase.

   • Your cash will be held in escrow by the SPAC. If the SPAC does not acquire a business within the specified time period (typically 36 months or less), your money will be returned plus interest.
5. 
   5
   Buy shares on the common market. If you are not eligible to get in on the IPO, you can still get shares in the SPAC a couple of weeks after IPO shares are allocated. Common shares are typically sold at a discount from the cash held in escrow.

   • The price of shares on the common market depends on whether the SPAC has announced which company it intends to acquire. If it hasn't announced a target for acquisition yet, shares typically will have a lower price because of the uncertainty. After the acquisition target is announced, the price of shares in the SPAC will depend on the reputation and financial health of that company.
6. 
   6
   Approve the business combination agreement. If you own shares in an SPAC, you must vote on any business combination agreement announced by the SPAC. The SPAC must get the approval of at least 60 percent of all shareholders.

   • If you intend to vote against the agreement, it typically is in your best interests to sell your shares on the secondary market. While you are entitled to a pro rata return of your assets, you'll likely get a better return on your investment by selling your shares.
   Advertisement

Expert Q&A

Search

Add New Question

Ask a Question

200 characters left

Include your email address to get a message when this question is answered.

Submit

Advertisement

Warnings

• This article primarily covers investment strategies in the United States. All of these methods may not be available in other countries. Consult an investment broker or financial advisor for more information.
  Thanks

  Helpful0Not Helpful0
• Fees for private-equity investments designed for smaller investors typically will be higher than the fees you would encounter with more traditional investments.
  Thanks

  Helpful0Not Helpful0
• Private equity investments are long-term investments. Unless you're prepared to commit your money for at least 10 years, go with a more traditional investment vehicle.
  Thanks

  Helpful0Not Helpful0

Advertisement