Private equity can be appealing for clients who want access to privately held companies and long-term growth. Access, however, is often limited to accredited and institutional investors.
In this article, you'll see how private equity funds are structured, who can invest, and the main strategies they use. Share it with clients as you assess whether private equity fits their goals and risk tolerance.
Private equity (PE) involves taking ownership stakes in companies that are not traded on public stock exchanges. It usually means buying private businesses or taking public companies private, then selling them later at a profit. These investments lock up capital for years and are less liquid than public stocks, so they tend to carry higher risk.
Most investors gain exposure through private equity funds that pool money to buy portfolios of privately held companies. These portfolios can include younger firms and established businesses that choose to stay private instead of listing on an exchange.
For more in-depth coverage of private equity and other alternative investments, you can visit and bookmark our Alternatives News section.
Private equity funds raise capital from investors, then use that pool to buy stakes in private companies or take public companies private. The fund's managers work with those businesses over several years to grow their value, then seek to exit at a profit through a sale or IPO.
A typical fund has a finite life, often around 10 years, with distinct formation, investment, and exit periods. During that time, the manager calls committed capital as deals close, manages each portfolio company, and eventually returns cash to investors through distributions.
Most private equity funds are structured as limited partnerships, with a private equity firm managing the fund and investors providing committed capital. There are often three entities involved:
Several structural features make private equity work differently from traditional public equity. These include:
Here are some of the key characteristics of private equity that investment advisors and investors should take note of:
Many private equity deals use debt to finance acquisitions, especially when buying entire public companies and taking them private. This leverage can increase gains when a turn‑around or growth plan succeeds, but it can also deepen losses if performance falls short.
Investors typically commit capital for 10 years or more, with limited options to exit early. Because there is no active secondary market for most fund interests, clients need to be comfortable locking up capital for the full fund term.
Private equity aims to deliver returns above public markets to compensate for higher risk and illiquidity. Managers look for companies where operational changes, growth initiatives, or strategic repositioning can increase the exit value over the holding period.
Private equity managers are hands‑on owners who work closely with portfolio companies to drive change. They may push cost reductions, new technology, add‑on acquisitions, or new markets to support value creation before an exit.
Private equity focuses on businesses that are not listed on public exchanges, or on public companies that are taken private as part of a deal. This opens access to a wide range of smaller, earlier‑stage, or private‑by‑choice firms that are not available through public stocks.
Access to private equity funds is usually restricted to accredited investors and large institutions. Minimum commitments are high, so most individual clients only participate if they already meet wealth or income thresholds. Here are a few examples of qualified PE investors:
If you want to find out which managers are growing in this market, you can check out our special report on the fastest‑growing investment management firms.
Private equity funds specialize in different strategies that shape risk, return, and client fit. Here are some of the most common approaches you will see in the market:
These strategies give you different tools to address client objectives around growth, income, and diversification. For a closer look at how private equity investing fits into portfolios, check out this expert overview.
When selecting a private equity strategy for a client, start with fit, not product. Here are key factors to weigh before you narrow specific fund options:
Begin with basic questions on growth, income, diversification, or some mix. Match those goals with risk tolerance, time horizon, and the client's comfort with illiquidity. Make sure any commitment still leaves enough liquid assets for near‑term needs.
Conduct careful research of the manager behind the strategy. Review their track record across cycles, the continuity of the investment team, and how they are paid. Check if fees and carry align their incentives with client outcomes.
Clarify whether the strategy focuses on buyouts, growth equity, venture capital, or another niche. Check sector and regional focus to see how exposures fit with the rest of the client's holdings. Ask how the manager plans to create value at the portfolio‑company level, not just source deals.
Understand the fund structure and cash‑flow pattern before you recommend anything. Drawdown funds call capital over time and return it through distributions, while some evergreen or interval vehicles handle subscriptions and redemptions differently. Compare minimums, fee terms, and how the strategy has deployed capital in earlier fund cycles.
Test every potential allocation against your duty to act in the client's best interest. Document why the strategy's risks, fees, and lockup length are suitable for that client. Be clear in advance about reporting, updates, and how the position fits into ongoing reviews.
If private equity is becoming a bigger part of your practice, this glossary entry is only a first step. For a deeper look at how private equity is showing up in RIA portfolios today, check out this article.
Whether private equity is a worthwhile investment depends on the client. You will need to weigh the potential benefits against trade‑offs in risk, cost, and access.
Here are some potential benefits of adding private equity to a client's mix:
Meanwhile, here are some potential drawbacks to keep in mind:
For most clients, private equity investment is not a simple yes or no. It is a tool that fits only when goals, risk tolerance, liquidity, and time horizon all line up. Test those factors honestly, then decide whether the potential return and diversification benefits justify the added complexity and illiquidity for a specific client.
Morningstar Retirement report unpacks the challenges and opportunities from adding private market fund exposure to defined contribution plans.
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