Private equity has been viewed as one of the most sought-after investments in finance. Pension funds, Ivy League endowments, and some of the world’s wealthiest investors have poured billions into it. If these sophisticated investors all want private equity, shouldn’t you?

The answer depends on something most discussions about private equity overlook.

How Private Equity Earned Its Reputation

Investing in private equity simply means investing in companies that aren’t publicly traded.

Instead of buying shares of companies on the stock market, private equity funds invest directly in privately owned businesses, often holding those investments for years before eventually selling them or taking them public.

There are good reasons institutions have invested in private equity for decades.

Private equity has historically offered the potential for attractive long-term returns, access to companies before they reach the public markets, and diversification beyond publicly traded stocks and bonds. Large institutions also have something many individual investors don’t: the ability to commit capital for long periods without worrying about when they’ll need the money back.

Those characteristics helped private equity earn its reputation. But they don’t eliminate the tradeoffs.

More Access Doesn’t Change the Investment

Private equity itself hasn’t fundamentally changed. What’s changed is who can invest.

Private equity firms are increasingly offering products designed for affluent individual investors, and platforms have made those investments more accessible than ever before.

More access gives investors more choices, but it doesn’t change how private equity works. The same tradeoffs that institutions have always understood still exist today.

Looking Beyond the Reputation

One of the biggest differences between private equity and traditional investments isn’t simply the potential return. It’s how the investments are structured.

Higher Fees and More Complex Valuations

Private equity generally costs more than traditional investing. Management fees are common, and many funds also charge performance fees when investments increase in value.

The important part isn’t just how much you’re paying. It’s when you’re paying it.

With publicly traded investments, everyone can see the market price every day. When an investment is sold, everyone knows exactly how much it gained or lost.

Private companies work differently. Because they aren’t publicly traded, their values are estimated periodically until the business is eventually sold. Some private equity funds use those estimated values to calculate performance fees before the investment is actually sold and the gain is known. If those estimates later prove too optimistic, investors may have already paid performance fees on gains that never ultimately materialized.

That doesn’t mean every private equity fund works this way. But it does illustrate why private equity often requires investors to look beyond reported returns and understand how the investment is structured.

Less Liquidity

Another important difference is liquidity.

Public stocks can generally be bought or sold any day the market is open.

Private equity works differently. Many investments limit withdrawals, require investors to commit money for years, or only allow redemptions during certain windows. That may fit well for institutions investing with decades-long time horizons, but for individual investors, especially those approaching retirement or expecting to use their investments for income, flexibility may be much more valuable.

The Real Lesson

Private equity didn’t earn its reputation because it was exclusive. It earned its reputation because it fit the needs of the investors who were using it.

Pension funds, endowments, and other institutions often invest with time horizons measured in decades. They have professional investment staff, extensive resources for evaluating managers, and the ability to leave money invested for long periods without needing immediate access.

Many individual investors have different priorities.

You may value lower costs, greater transparency, easier access to your money, or the simplicity of broadly diversified public investments.

That doesn’t make one approach better than the other; it simply means the investment should fit the investor.

Final Thoughts

Private equity may have a place in some portfolios, and its growing availability gives more investors the opportunity to consider it. But exclusivity was never what made private equity valuable.

What matters is whether it improves your financial plan.

If it helps accomplish something your current portfolio can’t, it may deserve consideration. If a broadly diversified, lower-cost, and more liquid portfolio already meets your needs, adding private equity simply because it’s now available may not improve your outcome.

Before committing capital to any private equity investment, it’s worth having a conversation about how it fits into your overall financial plan. If you’re considering private equity or have questions about an opportunity you’ve been presented with, I’d be happy to discuss whether it makes sense for your specific situation.

Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, NY, with offices in Ithaca, NY, and Vancouver, WA. Founded by Paul Sydlansky, CFP®, in 2016, it serves successful couples planning their next chapter—whether that’s retirement, part-time work, or a less demanding second act. Paul has worked in the financial services industry for 25+ years. Prior to founding Lake Road Advisors, he worked at Morgan Stanley in Manhattan for 13 years, where he was a senior-level manager within the Institutional Equities Department. In 2018, he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER® and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Vancouver, WA office at (607) 292-2172 or at the firm’s website at https://www.lakeroadadvisors.com/ 

This material has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.