Private equity was once available primarily to ultra-high-net-worth individuals and families. Over time, however, the investment landscape has evolved, and private equity has become a more mainstream option for investors. That said, it does not necessarily mean that everyone should own this type of investment.

 

Private equity can add another layer of diversification to a portfolio, but it also comes with several important considerations. These investments often involve higher fees, limited liquidity, and can be more difficult to value than traditional public market investments. On the other hand, private equity may provide increased diversification, reduced volatility compared to public markets, the potential for higher returns, and access to companies that may eventually go public.

 

For some of our clients, we do utilize select private equity opportunities. Depending on the type of private equity investment, it may be considered either more conservative or more aggressive. Because of this, we offer access to both approaches.

 

More conservative private equity investments typically focus on established companies with strong balance sheets and consistent cash flow. These companies often generate steady dividend income while gradually increasing in value over time. Think of these investments as the “Steady Eddie” approach—perhaps less exciting, but often more predictable. Historically, these types of investments may generate annual returns in the range of 6%–12% over time, while generally avoiding the severe market downturns sometimes experienced in public markets.

 

More aggressive private equity investments tend to focus on earlier-stage companies with higher growth potential. If these companies execute successfully, the returns can be significant (12%+ over time, but with much higher risk). These investments also provide access to companies that may eventually become publicly traded.

 

A good example is SpaceX. Some private equity funds have exposure to SpaceX, and some of our clients participate in those funds. While there has been speculation that SpaceX could eventually go public, there is no certainty regarding whether or when an IPO may occur. It is projected to go public this summer.  However, if such an event were to happen and the market responds favorably, the value of the private equity investment could increase significantly.

 

It is also important to understand that private equity funds are typically institutional investors and are often subject to lock-up periods after an IPO. This means they usually cannot immediately sell shares once a company becomes public and may need to wait several months before exiting positions.

 

For some investors, these opportunities can be exciting. For others, they may create unnecessary stress or uncertainty. As with any investment, it is important to determine whether private equity aligns with your financial goals, risk tolerance, and liquidity needs.

 

The bottom line is this: while private equity can provide valuable diversification and unique opportunities, it is not appropriate for every investor.

 

Happy Investing!

 

 

Spencer D. Neal, C(k)P®