How Can Smaller Investors Obtain Access to Private Equity Investment?
Private equity can produce some of the highest returns in the financial markets. Historically, private equity performance exceeds that in the broader stock market by as much as 3 percent annually, according to a 2012 National Bureau of Economic Research report. It's not surprising that small investors might want to gain access to this kind of above-average profit. While private equity is typically reserved for larger investors, the average investor can still participate, either directly or indirectly.
Small investors are individuals who are working either alone or with the support of a financial professional. As opposed to institutional investors, such as pension funds, charities and endowments, individual investors typically don't have the scale to invest in alternative investments, which generally require high minimum investments. Private equity is a type of alternative investment vehicle that acquires entire companies or individual assets, improves upon them and then sells them. While small investors aren't commonly named among private equity's clients, it is not impossible.
Private equity firms are increasingly looking to diversify their revenue streams, and through their larger institutional banking clients are marketing their funds to wealthy individuals. Investors should be prepared to invest a minimum of $1 million to gain access to private equity funds, according to a 2012 CNBC article. Private equity funds also began offering investors more traditional investment funds that still rely on alternative investment strategies but require a lesser up-front investment of anywhere from $2,500 to $25,000.
Unless small investors are aware of the asset allocation of their employer-sponsored retirement funds, they might have exposure to private equity investments and not even know it. Public pension funds are among the most pervasive private equity investors. In the first half of 2012, for those pensions worth more than $5 billion, more than 10 percent of assets were directed into private equity on average, according to a 2012 article in the Wall Street Journal.
Before investing in a non-traditional asset class such as private equity, small investors might want to understand the risks. For instance, private equity fee structures differ from more traditional investment funds, such as mutual funds. Private equity firms generally charge investors 2 percent of assets managed and retain 20 percent of profits, according to 2012 article in the Economist. Also, performance in private equity funds with more than $3.5 billion in assets tend to lag that of smaller funds, according to a 2012 article in the Wall Street Journal.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.