Beginner investors typically don’t start with private equity funds for several key reasons. Institutional investors, such as pension funds, insurance companies and foundations, make up the majority these funds’ participants. Individual investors generally come with deep pockets and lots of experience. To just get started, most funds require hundreds of thousands or millions of dollars in initial investments. They also will charge annual maintenance fees, and also performance fees when they generate returns.
What’s more, these funds are not regulated as tightly as public investment vehicles like mutual funds. And since private equity focuses on companies with little immediate value, there is substantial risk of failure. Success may depend on talented fund partners who can help make the companies viable and attractive to buyers, For this reason, it may be critical for investors to understand key details about the fund and private equity firm that controls it before joining one.
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