If you look at the most successful investors of all time, many of them made a large portion of their wealth in private equity deals well before those companies came to the public markets. By leveraging their networks, knowledge, and experience – they were able to spot start-ups with incredible potential and get in early – to reap the exponential returns over the long haul.
For most investors, this seems like it’s out of reach, and we have to settle with only considering public market investments. But that’s simply not the case. There are a couple of ways that you can still get exposure to private equities in your portfolio, and by taking advantage of them you get extra diversification and the chance to catch the next rocket ship.
One of the most interesting trends in the investment world over the past couple of years has been the growth in what we call equity crowdfunding. Instead of relying on large venture capital funds and private equity firms to provide early-stage capital, companies can now list their offering on a crowdfunding platform that allows ordinary individuals to pool funds together and invest as a collective. For the company involved, this means that they can get real fans of the product/service involved in the journey, but for the investor, it means that they can access deals that previously would never have been possible.
Some key platforms here include AngelList, SeedInvest, Fundable, and Microventures, but new competitors are popping up all the time. When you use a platform like this, you can make small investments into exciting private companies that are still early in their journey – and thus get a piece of the action in a way that matches your personal risk-return strategy.
Private Equity ETFs
Another way to get access to private equity exposure is to invest in private equity firms themselves. The way this is done is through an exchange-traded fund (ETF) which is listed on public stock markets – but that tracks the performance of specific private equity portfolios managed by particular financial institutions.
This is an easy way to get access to this asset class because there are no additional barriers to entry, and you don’t have to seek the specific deals yourself. You can essentially put your money behind a professional private equity firm that is in the weeds day after day and ride on their coattails.
Some of the most popular private equity ETFs include:
- Invesco Global Listed Private Equity Portfolio: which currently holds 82 private equity investments in its portfolio across the world with assets under management (AUM) of just over $285m.
- iShares Listed Private Equity UCITS ETF: which invests in a variety of private equity companies across the developed world. Their AUM is over $1bn as of the time of writing.
- VanEck BDC Income ETF: which has 25 holdings of private equities that focus on income generation rather than simply focusing on capital appreciation. This is a good option if you’re looking for consistent dividends rather than capital growth.
These options and more represent simple and transparent ways to invest in private equity in the same way as you would with public stocks – making them a nice entry into these alternative investments.
Invest Directly with a Private Equity Firm
If you are a large enough investor and have some specific advantage in one particular industry, you could certainly approach a private equity firm to become one of their investors/clients. This would give you direct access to the deals and more of a say in how things go.
This is inaccessible for most people though, simply because you need to be able to show how you can add value to that company to be taken seriously. This can be through sheer financial force, domain expertise, connections and networks, or a variety of other things – all of which will be specific to the firm itself and the particular deal you’re interested in.
The last way to access private equity is to take on the investments yourself and become an angel investor yourself. The idea here is to identify start-ups that you believe in and approach them directly to invest while they’re still looking for product-market fit. If you can demonstrate value to them and help them grow their operations, they might consider selling you a small portion of equity that you could hold and hope to realise the long-term returns.
Again, this sort of approach is only for specific people who have a knack for these sorts of deals, but it can be incredibly effective when done well – and it provides a great option to diversify your investments and give yourself a chance to catch the next big thing.
Those are just a few ways that you can add private equities to your portfolio and gain access to a risky, but exciting asset class that has the potential for exponential returns over the long term.
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