A Smarter Way to Invest, or Just More Complexity?
If you have significant wealth, you’ve probably had conversations about private equity at some point. Maybe a friend raved about getting in early on a company that later went public. Or maybe your advisor mentioned it as a way to diversify beyond stocks and bonds.
It sounds intriguing—private equity deals often involve buying into businesses before they go public, and some investors have made serious money this way. But at the same time, these investments can be illiquid, complex, and highly dependent on the people running them.
So, is private equity for individual investors smart? Or is it just an exclusive club where a few people hit it big while others get stuck waiting years to see a return? Let’s break it down in plain English so you can decide if it makes sense for your portfolio.
Private Equity vs. Public Equity: What’s the Difference?
The difference between public and private equity is simple:
- Public equity = Stocks you can buy on the market, like Apple or Microsoft. Anyone can invest, prices update constantly, and you can sell whenever you want.
- Private equity = Investments in companies before they go public (or companies that choose to stay private). You can’t buy or sell these investments easily, and returns take years, not months.
Think of public companies like buying a house in an established neighborhood—there’s plenty of data, you can check recent sales, and if you want to sell, you can list it on the market anytime.
Private equity is more like investing in a piece of land that’s being developed. It might turn into a booming commercial district, or it might sit untouched for years. Returns can be huge, but you’re taking on more risk, longer time horizons, and less predictability.
Why Do Companies Stay Private Instead of Going Public?
If a company could raise billions by selling shares on the stock market, why wouldn’t it? Turns out, going public comes with baggage.
- Public companies have to answer to Wall Street. Once a company is public, every quarter is a new test. Did they hit their earnings targets? If not, their stock price tanks—even if it’s just a short-term issue. Private companies don’t have to deal with this pressure.
- They want to keep control. When a company goes public, founders and early investors often lose decision-making power. Private companies can grow on their own terms.
- It’s expensive to go public. IPOs cost a fortune in underwriting fees, legal paperwork, and compliance costs. Staying private avoids all of that.
Many successful businesses today actively avoid going public because private equity allows them to raise money without the headaches of being a public company.
The Catch: Private Equity Is Not Easy to Cash Out
The biggest downside of private equity is that your money is locked up for a long time.
When you invest in private equity, you’re often committing for 5 to 10 years before you can cash out. Unlike stocks, which you can sell at any time, private equity investments don’t have a liquid market.
Let’s say you invest in a private company through a fund. That company might:
- Get acquired by another company (giving you a payout)
- Go public through an IPO (allowing you to sell your shares)
- Stay private indefinitely (meaning your money stays locked up)
If you’re considering private equity, ask yourself: Can I afford to not touch this money for several years?
If the answer is no, this might not be the right asset class for you.
Returns: Big Winners, Big Losers, and a Lot in Between
One reason private equity is attractive is the potential for big returns. But here’s what people don’t always tell you:
- The best private equity deals make huge money—some investors see annualized returns of 20-30% or more in top-tier funds.
- The worst investments underperform the stock market. If you’re in the bottom half of private equity funds, you might not do much better than a simple S&P 500 index fund.
- There are no daily price updates like with stocks. Private equity firms “self-report” valuations, which means there’s often a reporting bias where companies look better on paper than they actually are.
This means choosing the right private equity manager is crucial.
In public markets, you can invest in an index fund and get the average return. In private equity, the difference between the top 10% of funds and the bottom 10% is huge.
Does Private Equity Actually Reduce Risk?
Private equity is often pitched as a diversification tool—a way to invest in something that doesn’t move in sync with public markets. That’s partly true.
If the stock market crashes, private companies don’t see their valuations drop overnight like public companies do. But that doesn’t mean private equity is immune to downturns. If a recession hits, private businesses suffer too. The difference is you just don’t see the impact right away because private equity firms don’t report real-time price changes.
For investors with significant assets, private equity can be a useful diversification tool—but it should be part of a broader strategy that includes liquid investments as well.
So, Is Private Equity Right for You?
Private equity isn’t for everyone. It requires:
- A long time horizon (expect to hold your investment for years)
- The right connections (investing in top-tier funds makes a huge difference)
- Comfort with risk (returns are not guaranteed, and you won’t have liquidity)
That said, for investors with a high net worth and a well-structured portfolio, private equity can be a great way to access high-growth businesses before they hit the public markets.
At Keen Capital, we specialize in helping investors navigate private market opportunities in a way that aligns with their overall financial strategy.
Our team helps evaluate:
- Which private equity funds make sense for your portfolio
- How much of your wealth should be allocated to private investments
- Tax-efficient ways to structure private equity investments
If you’re considering private equity as part of your investment strategy, let’s talk.
You can schedule a quick introductory chat by heading over to our Getting Started page to see how private investments can fit into your broader wealth plan.
Until next time.
