Private Investor Basics: What You Need to Know

Private investing can be a great way to diversify your portfolio and potentially earn higher returns, but it's not for the faint of heart. Private investors typically have a minimum investment requirement, which can range from $5,000 to $50,000 or more.

To get started, you'll need to understand the different types of private investments, such as private equity, venture capital, and real estate. Private equity investments involve investing in companies that are not publicly traded, while venture capital investments focus on startups and early-stage companies.

Private investors often have to be prepared to hold onto their investments for the long haul, sometimes 5-10 years or more. This requires a high degree of patience and a willingness to ride out market fluctuations.

Related reading: What Is the Difference between Private Equity and Venture Capital

Investing in private equity can be a game-changer for your portfolio, with historically higher returns than the public market.

Private equity valuations aren't influenced by the larger market, giving private companies more flexibility in their accounting practices.

Higher returns come with higher risk, but the potential reward is well worth it. According to the Bain & Company Global Private Equity Report 2023, private market returns have outpaced public market returns over every time horizon.

Private markets offer a premium for the lack of liquidity you agree to take on, allowing for higher returns. This is especially true for younger and smaller companies, where a smaller investment can yield a larger stake.

The access to younger and smaller companies in private markets provides the opportunity to realize larger gains than in the public market. Alphabet, Amazon, Apple, and Meta are high-performing stocks, but their size and age make shares very costly to acquire.

Backing a nascent enterprise and sticking with it can lead to significant returns. The average age of a company issuing an IPO is between 8 and 10 years of age, according to the California Legislative Analyst’s Office.

Spreading capital over a wide variety of investment options is healthier for an investment portfolio, and private markets can provide size diversification. Public market investments tend to lock investors into larger companies, while private companies are usually smaller.

Over the past 15 years, private equity has marked 14% annualized returns, while the S&P 500 posted 9.3%, the Russell 3000 returned 10%, and MSCI World delivered 7.2%.

Private equity firms can use your contribution to generate profit through various types of deals, such as leveraged buyouts or growth capital investments.

There are two common types of private equity investments: leveraged buyouts and growth capital investments.

You can also invest in private equity through private equity exchange-traded funds (ETFs), which offer exposure to publicly listed private equity companies.

Private equity ETFs are a great option for those who aren't accredited investors or can't meet the minimums required by traditional private equity funds, as they allow you to track the success of these companies without a hefty minimum investment.

Take a look at this: Hedge Fund vs Private Equity vs Venture Capital

Investing in private markets offers a wide range of benefits, including the potential for higher returns due to the lack of liquidity.

Private markets provide access to a wider variety of investment opportunities than public markets, with over 1,000 private equity funds available globally.

You can get a larger stake in smaller, privately held companies with the same amount of money it would take to buy a small share of a larger public company.

Backing a company early on in its development can lead to higher investor returns, with the highest returns typically going to those who invested early.

Private market investments can provide size diversification, spreading capital over a variety of investment options that encompass a broader representation of the economy.

Private market investments have outperformed public assets, with private equity delivering 14% annualized returns over the past 15 years.

Private investors can provide immediate money to startups, allowing them to begin growing right away, unlike loans and grants which can take weeks or months to secure.

Private investors often don't require a credit check, making it easier for startups to secure funding, regardless of their financial history.

Private investors can also offer additional expertise and guidance, as they want the startup to succeed and often take on an advisory role.

Expand your knowledge: Early History of Private Equity

Private equity firms can use your contribution in various ways to generate profit, depending on the types of deals they specialize in. Some private equity firms focus on distressed investing, where they help struggling companies with critical financing needs.

Distressed investing is a type of private equity investment where firms specialize in buying and turning around struggling companies. This can be a high-risk, high-reward strategy.

Growth equity is another type of private equity investment where firms provide funding to expanding companies beyond their startup phase. This can help companies scale and achieve their growth potential.

Private equity firms can also specialize in sector-specific deals, such as technology or energy deals. This can be beneficial for companies in those sectors, as they receive targeted investment and expertise.

Some private equity firms focus on secondary buyouts, where they buy companies owned by other private equity firms. This can be a way for firms to expand their portfolios and gain access to new companies.

Carve-outs are another type of private equity investment, where firms buy corporate subsidiaries or units. This can be a way for companies to spin off non-core assets and focus on their core business.

Here are some common types of private equity investments:

ETFs can be a great way to diversify your portfolio and gain exposure to various assets.

Private equity ETFs offer a way to invest in publicly listed private equity companies, allowing you to participate in their success without the hefty minimum investment required by traditional private equity funds.

You can invest in private equity ETFs without being an accredited investor or meeting the minimums required by private equity funds.

Private equity ETFs track the performance of these companies, giving you a share of their success.

Expand your knowledge: Private Investor Funds

Venture capital is a type of private equity investment that involves identifying early-stage startups looking to raise cash in exchange for equity in the company.

The goal of venture capital is to invest in companies with high growth potential that can either be sold at a later date or taken public through an initial public offering (IPO).

In fact, private equity has marked 14% annualized returns over the past 15 years, compared to 9.3% for the S&P 500.

For your interest: Difference between Venture Capitalists and Angel Investors

Venture capital firms take a stake in these companies, often providing guidance and expertise to help them grow.

This can be a lucrative opportunity for investors, as the highest investor returns typically go to those who backed the company early on in its development.

The average age of a company issuing an IPO is between 8 and 10 years, according to the California Legislative Analyst’s Office.

By investing in venture capital, you can tap into the potential for higher returns and diversify your portfolio.

Private market investments have outperformed public assets considerably, offering a wider variety of investment opportunities and the chance to realize larger gains.

A buyout is when a private equity firm buys a target company with the hope of selling it later at a profit.

One of the earliest corporate buyouts was in 1901, when J.P. Morgan bought Carnegie Steel Corp. for $480 million and merged it with Federal Steel Company and National Tube to create U.S. Steel.

Private equity firms often use capital from the fund as well as borrowed money to complete a buyout, using the assets of the company being purchased to secure the loan.

In 1989, KKR engineered what is still the largest leveraged buyout in history after adjusting for inflation, buying RJR Nabisco for $25 billion.

The goal of a buyout is to make improvements to the company's operations or management, or help the company grow, with the intention of selling it for a profit, known as an exit.

Private equity firms might identify a company with room for improvement, buy it, and then turn around and sell the company for a profit, similar to flipping a house.

Investment funds come in different forms, but private funds are one of the most exclusive and lucrative options. Private funds are designed for sophisticated investors who meet specific net worth and income requirements.

To qualify as an accredited investor, you need to have more than $1 million in net worth, excluding your primary residence, or $200,000 in annual income for an individual and $300,000 for a couple. This means that only a select few can participate in private fund investments.

Private equity funds, in particular, offer a unique investment opportunity. As a limited partner, you supply the capital that helps the firm make investments, but you won't be responsible for managing the companies or handling the eventual sale or public offering.

Limited partners have limited liability, meaning they can only lose the amount they invested in the fund. Typically, the firm takes about 20% of the profits, and the rest is split among the limited partners based on their contribution to the fund.

On a similar theme: Private Investor Looking for Projects to Fund

As a private investor, you'll go through a process to invest your money. This process typically involves researching and selecting investment opportunities, such as stocks, bonds, or real estate.

Private investors often use a variety of methods to find investment opportunities, including networking with other investors and using online platforms.

To get started, you'll need to set a budget for your investments, which can be a fixed amount or a percentage of your income, as seen in the example of a private investor who invests 10% of their income.

Private investors also need to consider their risk tolerance, which can impact the types of investments they choose, such as a conservative investor who sticks to low-risk investments like bonds.

Investing in private markets can be a great way to diversify your portfolio and potentially earn higher returns. The average age of a company issuing an IPO is between 8 and 10 years old, and investors who back companies early on tend to see the highest returns.

Investing in private markets also provides access to a wider variety of investment opportunities, with over 14% annualized returns in the past 15 years. This is significantly higher than public market investments, which have returned around 9.3% over the same period.

To get started with private market investing, consider reaching out to your personal network, including high school friends, old colleagues, and former professors. These individuals can provide valuable connections and potentially invest in your startup.

Private investment centers on networking, so be sure to grow your connections and expand your potential investor pool. Participate in pitch competitions and join LinkedIn business communities to meet entrepreneurs, mentors, and investors.

If you're looking to invest in a VC, start by curating a list of firms that cater to your industry or niche. Some VCs, such as Backstage Capital, invest in startups founded by women, people of color, and members of the LGBTQIA+ community.

J.P. Morgan's 1901 purchase of Carnegie Steel Corp. for $480 million marked one of the earliest corporate buyouts and one of the largest relative to the market and economy.

In 1919, Henry Ford used borrowed money to buy out his partners, who had sued him after he slashed dividends to build a new auto plant.

The largest leveraged buyout in history, adjusted for inflation, was engineered by KKR in 1989 when they bought RJR Nabisco for $25 billion.

When it comes to fund capacity, there are specific limits that private investment funds must follow. A 3C1 fund, for example, can have up to 100 accredited investors.

Accredited investors must meet certain individual wealth tests, including having more than $1 million in net worth or $200,000 in annual income for an individual and $300,000 for a couple.

A 3C7 fund, on the other hand, can have a soft limit of around 2,000 qualified investors. Qualified investors must hold assets in excess of $5 million.

Venture capital funds organized under section 3(c)(1) can have up to 250 beneficial owners, provided that they raise no more than $10 million.

Private investment funds are often preferred because they have more freedom in handling reporting and redemptions. This flexibility allows them to invest in illiquid assets that would be difficult for public funds to handle.

Many hedge funds remain private to avoid using aggressive trading strategies that could erode their profitability. Public reporting would tip their hand to the market.

Private investment funds can also be used to manage significant family wealth. Extremely wealthy families can create personal investment companies to invest their wealth with family members as shareholders.

A company can serve as the initial structure for this arrangement, and it's repurposed to create a capital investment arm from the profits of the business. In this case, the family doesn't need or want outside capital, so there's no incentive to take the fund public.

Private market investing refers to investments made in companies that are not listed on a stock exchange, also known as private companies.

These investments can increase a company's value, giving investors the opportunity to realize gains from a trade sale, buyout, recapitalization, or initial public offering (IPO).

In the past, individual investors needed to meet the criteria of an accredited investor to access private market opportunities.

Private market investing offers a chance to increase the value of a company, allowing investors to realize gains from a trade sale, buyout, recapitalization, or IPO.

These investments are made in companies that aren't listed on a stock exchange, meaning they haven't "gone public" yet.

Traditionally, access to these opportunities was limited to accredited investors.

However, the SEC's Regulation A has opened the door for individual investors to take advantage of these opportunities.

Individual investors can now access private market investing through platforms like Yieldstreet's alternative investment strategies.

This shift has made it possible for more people to invest in private markets, even if they don't meet the criteria of an accredited investor.

Private market investing has outpaced other asset classes since 2008, with net returns of over 14% compared to the public market's 5.91% over the same two decades.

The main difference between private and public market investing is liquidity. Private market investments are less liquid, meaning investors can't easily sell their shares.

Public market investments, on the other hand, have easy-to-trade stocks and bonds, allowing investors to liquidate their position at any time. This liquidity contributes to their volatility.

Private market investing may be better for people who can afford to have their money tied up for a while and won't suffer a severe financial setback if the investment fails to perform.

Private companies are subject to relaxed regulatory restrictions, which has led to an increase in liquidity in the private marketplace, giving companies more room to grow.

Private investment funds are a key player in the market, but they're not open to retail investments. This allows them to take on high-risk assets that public fund managers can't touch.

Venture capital funds are a type of private investment fund, known for their bold bets on new companies. They often lead to huge returns, but also come with a high risk of failure.

Hedge funds are another example of private investment funds, which use complex strategies to minimize risk and maximize returns. Their ability to invest in a wide range of assets gives them an edge in the market.

Private market investing offers a unique opportunity to invest in companies that are not listed on a stock exchange, providing a chance to realize significant gains from a trade sale, buyout, recapitalization, or IPO.

The SEC's Regulation A has opened the door for individual investors to access these opportunities, which were previously limited to accredited investors.

Private equity has outpaced other asset classes since 2008, with net returns of over 14%, and has experienced less volatility than the market in general.

The US Private Equity Index boasts a 10.48% 20-year return, significantly outperforming the S&P 500's 5.91% return over the same period.

Many companies are opting to stay private, as they no longer need the public exchanges to raise capital, and the increased liquidity in the private marketplace has given them more room to grow.

Investing in private markets can offer a premium for the lack of liquidity, with the potential for higher returns due to the longer investment periods.

There exists a much wider variety of investment opportunities in private markets than in public markets, providing a chance to realize larger gains from backing younger and smaller companies.

The average age of a company issuing an IPO is between 8 and 10 years, and the highest investor returns typically go to those who backed the company early on in its development.

Investing in private markets can provide size diversification, spreading capital over a wide variety of investment options that encompass a broader representation of the economy.

Private market investments have outperformed public assets considerably, with private equity marking 14% annualized returns over the past 15 years, compared to the S&P 500's 9.3% return.