SpaceX, wework, Airbnb, Instacart, and Robinhood are just a few of the incredible private companies in America. Many are poised to generate incredible profits for their shareholders.
The only problem is that you normally can’t buy into these types of companies unless you are an “accredited investor.” More on that later, but an accredited investor is basically a millionaire or someone who has a high income ($200k+).
So what can the rest of us do to get a piece of the private equity pie? We’ll get into that, but first a quick intro to private equity.
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What is Private Equity?
Private equity is a type of alternative investment that allows you to buy ownership shares in companies that are not publicly traded. Usually, these companies are larger, more well-established firms (like the ones mentioned above).
Contrast that against venture capital investments that focus on promising start-ups.
I won’t go into great detail on the mechanics of how private equity investments work, but basically, the private equity firm assembles a group of investors to purchase ownership interests in the target company and holds those interests for the medium to long term.
This article provides an in-depth overview of private equity if you want to learn more.
The minimum investment is usually very high (we are talking about a general range of $250,000 to $25 million), although there are outliers.
Fees paid to the private equity firm are steep as well – usually 2% of the assets under management and 20% of the profits. And because of the long holding period, your investment is not very liquid.
But despite all of that, private equity can also be extremely profitable, which is why it is such a sought after investment among many of the well-heeled.
First, the Bad News
As I mentioned, if you are not an accredited investor (and for purposes of this article, we’ll assume you are not), you are generally not given access to private equity investments in companies like wework, SpaceX, and Robinhood.
An accredited investor is someone who has a net worth of at least $1,000,000 (individually or jointly with a spouse) or makes $200,000 per year individually (or $300,000 jointly) for the last two years, with an expectation of earning at least that much in the current year.
There are some exceptions that allow non-accredited investors to participate in private equity investments, but they are very narrow.
One exception, for example, would be if you know the founder of a start-up who is offering you the chance to invest. In that case, SEC rules allow private companies to sell shares to as many as 35 unaccredited investors.
Even then, you must have enough knowledge and experience in financial and business matters to be able to evaluate the pros and cons of the investment opportunity.
For the vast majority of folks, this type of narrow exception is not going to apply, so let’s move on to what a normal investor can do in this space.
You Can Invest in Publicly-Traded Private Equity Firms
Some of the biggest include Apollo Global Management (ticker symbol APO), The Blackstone Group (BX), and KKR (KKR). These are each multi-billion dollar companies. And they have collectively over a trillion dollars of assets under management.
You are probably going to recognize some of these names.
As a shareholder of any of these companies, you get the benefit of their expertise in selecting the target companies for purchase or investment. And you don’t have to front massive amounts of money and have it tied up for many years.
That being said, these are still investments in individual stocks, so the lack of diversification can pose heightened volatility and risk.
But the clever folks on Wall Street have an answer. Enter the private equity ETF.
You Can Invest In Private Equity ETFs
What is a Private Equity ETF?
A private equity ETF is an exchange traded fund that offers exposure to private equity investments. The private equity ETF does this by tracking indexes that consist of publicly listed companies that invest in equity or debt of privately-held companies.
There are a handful of these types of ETFs available.
This site lists these ETFs and provides information about them. As with direct investing in a company like Blackstone or KKR, you should be able to invest in these ETFs through your brokerage account with a click of the mouse.
I would carefully read the prospectus on these funds before considering investing to make sure you are comfortable with the firms making up the index and the companies that these firms are investing in.
I would also take a good look at the expense ratios of these ETFs (some of which seem pretty high to me).
A bit of news circulated around in early 2020 about Vanguard getting into the private equity space. I love Vanguard for its low expense philosophy and was happy to hear this.
Unfortunately, it looks like the fund will only be open to institutional investors initially (although there appear to be plans to open it up to retail investors in the future). Can’t wait to see what that looks like.
Related Reading: To learn more about private equity ETFs, check out this article.
You Can Invest in Private Equity Through Crowdfunding
If the first two options are not appealing to you, there is a third option available.
The JOBS Act in 2012 opened the door (but not all the way) to investing in privately held companies to non-accredited investors. As a result, a number of crowdfunding platforms emerged that focus in this area.
This article provides a list of some of the crowdfunding platforms out there. Seems like there has been a lot of growth in this area.
While not the same as directly investing in a company like SpaceX or Robinhood, these platforms seem to permit you to make relatively modest investments in small, early-stage companies. And you can spread your risk, by allocating your money among numerous investments within the platform.
As mentioned above, the JOBS Act only partially opened the door. You should be aware that there are limits on how much you can invest through crowdfunding, depending on your income and net worth.
This article discusses investment limits for non-accredited investors if you are curious.
Even though you won’t be dropping a few million in SpaceX and seeing your money skyrocket (sorry couldn’t help myself), it’s nice to know you can still get meaningful exposure to private equity just like the big leaguers can.