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How Retail Investors Can Now Tap Into Private Equity
Key Takeaways
- Increasingly, PE is accessible to everyday retail investors, who account for half of all wealth globally.
- Private equity refers to investment funds that purchase and manage companies, then sell them.
- Some of the industry’s largest funds are pushing to improve access to more retail capital.
Historically, private equity (PE) has been the exclusive province of high-net-worth individuals and institutional investors. That is no longer the case. Increasingly, PE is accessible to everyday retail investors, who account for half of all wealth globally, according to Bain & Company in a 2023 global private equity report.
Such investors can use PE, an alternative asset class, to diversify their holdings. Indeed, there is burgeoning interest in options for retail participation, including in private markets in general. Due to their indirect correlation to constantly fluctuating public markets, private markets are less volatile.
Having said that, here is how retail investors can tap into private equity.
Demystifying Private Equity
Private equity refers to investment funds that purchase and manage companies, then sell them. These funds are run by PE firms largely for accredited and institutional investors, although retail investors now have real options.
PE funds may wholly buy public or private companies or, as part of a consortium, invest in buyouts. Typically, they have no position in companies listed on a stock exchange.
While PE is often categorized with venture capital, it mostly invests in mature company buyouts. By contrast, venture capital focuses on startups. Private equity funds and firms manage their portfolio companies to heighten their value. They also may seek to derive value before, in the future, exiting the investment.
Opening Up for Retail Investors
PE funds have had robust returns overall since the last generation, spawning rapid industry growth. Just three years ago, PE buyouts reached a record $1.1 trillion, doubling 2020 totals. Such growth is occurring amid greater allocations to alternative investments.
Retail investment is part of that growth, due in part to the relatively poor performance of public markets. Individual investors hold about half the global assets under management, amounting to as much as $295 trillion.
However, there are structural challenges in PE for retail investors — individuals who possess investable assets of less than $1 million. Those barriers include high minimums, lack of transparency, and liquidity. Depending on the PE fund type, investor commitment could be a decade or more. That is more than what many individual investors are used to.
Still, some of the industry’s largest funds are pushing to improve access to more retail capital. Blackstone, for example, says it may increase retail capital from $200 billion to $500 billion. Up to half of new capital raised by KKR is expected to come from the private space.
And there are new avenues for participation, including fund of funds, in which private wealth firms invest on behalf of 100 clients in a single deal, acting as general partners. With this approach, the number of advisors that must be targeted drops, along with the number of individual relationships that must be formed. Both sides must conduct due diligence, however.
Although less common, there are also secondary market platforms that purchase existing shares in PE funds. Increasingly, investors are considering secondary trading in private equity, involving companies that have not yet gone public.
Many such companies are in early-growth stages, potentially opening up prospects for benefiting from that increase in value. PE secondary trading digital marketplaces permit investors to purchase and sell shares in private companies. Transactions are completed faster than possible on public exchanges and fees are relatively lower.
Then there are regulation changes. Initiatives such as Regulation A+ are opening up some direct investments. The reference here is to an exemption that permits small businesses to sell shares to the general public, allowing nearly anyone to invest in a company through crowdfunding.
Regulation A+ permits crowdfunding platforms and new businesses to raise needed funds through accredited as well as non-accredited investors. In addition, it allows companies that seek equity funding to advertise their offerings publicly.
Regulation A+ permits all investors to participate, whereas previously, most available exemptions let companies only accept investments from accredited investors.
Exploring Alternative Investments and Private Markets
Alternative investments are increasingly popular. After all, the S&P 500 index has dropped some 15% this year (2024) to date, prompting more investors to turn toward alternative assets — those other than stocks and bonds. Some $6.2 trillion in alternative assets are under management globally.
Such assets can provide higher returns than stocks, help reduce overall portfolio risk, and can shield against inflation. After all, over nearly the last two decades, private markets have outperformed stocks in every market downturn.
Platforms like Willow Wealth provide curated access to private markets for individual investors. While the risk remains, these platforms offer opportunities across real estate, private credit, private equity, and more.
Investors can get started with minimum investments as low as $5,000 for their first investment (subject to certain exceptions). Willow Wealth offers curated investments across multiple asset classes, with options ranging from individual investments to diversified funds and automated portfolio solutions.
Learn more about the ways Willow Wealth can help diversify and grow portfolios.
In Summary
Retail capital is gaining traction in PE, and projections are that it will ultimately become a key fundraising source for alternative managers. After all, about a third of advisors in 2022 were either investing in seeking alternative investments, including private equity. In the past, such opportunities were limited for individual investors. There are now more offerings available for retail investors, including in the PE space.
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