How to Invest in Private Equity as a Retail Investor

Private equity has traditionally been an exclusive asset class, primarily accessible to institutional investors and high-net-worth individuals. However, recent innovations have allowed retail investors to participate, offering the potential for higher returns but also introducing unique risks and challenges.

Understanding how to access private equity as a retail investor requires careful consideration of available options, investment structures, and key limitations.

Eligibility for Retail Involvement

Access to private equity for retail investors depends on regulatory classifications and financial thresholds. In the United States, the Securities and Exchange Commission (SEC) defines accredited and qualified purchasers, determining who can invest in private securities.

As of 2024, an accredited investor must have an annual income exceeding $200,000 ($300,000 for joint filers) for the past two years with an expectation of maintaining that level, or a net worth of over $1 million excluding their primary residence. Qualified purchasers must have at least $5 million in investments.

For those who do not meet these thresholds, certain exemptions allow limited participation. Regulation CF (crowdfunding) permits individuals earning less than $124,000 annually to invest up to 5% of their income, while those earning more can allocate up to 10%, with a maximum limit of $124,000 per year. Regulation A+ allows investments in private offerings but limits companies to raising $75 million annually, restricting the scale of available opportunities.

Outside the U.S., other jurisdictions impose their own frameworks. In the European Union, the Alternative Investment Fund Managers Directive (AIFMD) governs private equity access, often requiring investors to meet professional client status under MiFID II. In the United Kingdom, the Financial Conduct Authority (FCA) mandates that retail investors demonstrate sufficient knowledge and experience before engaging in complex financial products. These regulations aim to protect individuals from the risks and illiquidity associated with private equity.

Types of Entry Points

Retail investors have several options to access private equity, each with distinct structures, risks, and regulatory considerations. While traditional private equity funds remain largely inaccessible due to high minimums and accreditation requirements, alternative mechanisms have emerged to facilitate broader participation.

Crowdfunding

Equity crowdfunding platforms allow individuals to invest in private companies through SEC-regulated offerings under Regulation CF and Regulation A+. Platforms such as StartEngine, Wefunder, and Republic enable non-accredited investors to allocate capital to early-stage businesses, often with minimum investments as low as $100.

Under Regulation CF, the maximum an issuer can raise is $5 million per year, and individual investment limits are based on income and net worth. These offerings must comply with SEC disclosure requirements, including audited financial statements for raises exceeding $1.235 million. While crowdfunding provides accessibility, it carries high risk due to the early-stage nature of the companies, limited liquidity, and potential dilution from future funding rounds. Investors should carefully review offering circulars (Form C filings) and financial disclosures before committing capital.

Feeder Funds

Feeder funds pool capital from multiple investors to gain access to institutional private equity funds that would otherwise be out of reach. These vehicles are typically structured as limited partnerships or limited liability companies and are managed by an intermediary firm that negotiates entry into larger funds.

Platforms like Moonfare and Yieldstreet offer feeder fund structures that allow individuals to invest in private equity with minimums as low as $10,000 to $50,000, compared to the $1 million or more typically required by direct institutional funds. These funds often charge additional management fees on top of the underlying fund’s expenses, which can erode net returns. Investors should scrutinize fee structures, carried interest terms, and lock-up periods, as these funds often require multi-year commitments with limited redemption options. Additionally, tax treatment can be complex, as investors may receive K-1 forms for pass-through income, which can impact tax planning.

Secondary Market Access

The secondary market allows investors to buy and sell private equity fund interests, offering a potential liquidity option. Platforms such as Forge Global and EquityZen facilitate transactions in pre-IPO shares and private fund interests, enabling individuals to gain exposure to late-stage private companies or existing private equity commitments.

Secondary market transactions often occur at a discount to net asset value (NAV), reflecting the illiquidity and risk associated with these investments. Pricing is influenced by factors such as the remaining fund life, portfolio performance, and market conditions. Investors should be aware of transfer restrictions, as many private equity funds require general partner approval before interests can be sold. Additionally, transaction fees can be significant, with some platforms charging commissions ranging from 3% to 5% per trade. Due diligence is essential, as secondary buyers inherit the original investor’s capital commitments and potential unfunded obligations.

Investment Minimums

Private equity investments often require substantial capital commitments, making entry challenging for individuals without significant financial resources. While traditional private equity funds set minimum investments in the millions, newer structures have lowered these thresholds.

Retail-focused private equity funds, such as interval funds and tender offer funds, typically have lower entry points than institutional counterparts. These funds, structured as closed-end investment vehicles, may set minimums between $2,500 and $50,000. They provide periodic liquidity through share repurchase programs but still require investors to commit capital for extended periods. Unlike direct private equity investments, these funds operate under SEC regulations, offering greater transparency and investor protections.

Investment minimums also vary based on fund strategy. Buyout-focused funds, which acquire controlling stakes in mature companies, generally require higher commitments due to the capital-intensive nature of leveraged transactions. In contrast, venture capital funds targeting early-stage startups often allow smaller investments, particularly when structured as co-investment opportunities or through syndicates. Some platforms enable individuals to participate in venture deals with as little as $1,000, though access to high-quality opportunities remains competitive.

Holding Periods

Private equity investments require long-term commitments, with holding periods often extending beyond a decade. Unlike publicly traded stocks, which can be bought and sold at any time, private equity funds follow a structured lifecycle that dictates when capital is deployed and returned.

Investors typically commit funds upfront, but capital is drawn down gradually as the fund identifies opportunities. This staged deployment means that even though an investor commits a certain amount, it may take years before the full sum is put to work.

Once invested, capital remains locked up as private equity firms seek to improve operations, expand market reach, or restructure portfolio companies before exiting. Growth equity and buyout funds often hold companies for five to seven years before seeking an exit through a sale or IPO, while distressed asset funds may have shorter time horizons depending on turnaround prospects. Venture capital-backed startups can take a decade or more to achieve a liquidity event, particularly if market conditions delay an IPO or acquisition.

Tax Treatment

Private equity investments come with complex tax implications that vary based on structure and jurisdiction. Unlike publicly traded securities, which are subject to straightforward capital gains and dividend taxation, private equity returns often involve multiple tax considerations, including pass-through income, carried interest, and foreign tax exposure.

For U.S. investors, many private equity funds are structured as limited partnerships, meaning income is passed through to investors and taxed at individual rates. Investors typically receive a Schedule K-1, detailing their share of income, deductions, and credits. Long-term capital gains from asset sales within the fund are taxed at rates up to 20%, while ordinary income components, such as management fee offsets, may be taxed at rates as high as 37%.

International investors or those participating in offshore private equity funds may face additional tax complexities, including withholding taxes on distributions and reporting obligations under the Foreign Account Tax Compliance Act (FATCA). Some jurisdictions impose tax on unrealized gains through mark-to-market rules, while others offer tax deferral benefits through structures like Luxembourg-based SICAVs. Investors should consult tax professionals to navigate these intricacies.

Redemption Mechanics

Private equity investments offer limited liquidity, making redemption a complex process. Investors must understand the mechanisms through which they can exit their positions, whether through fund distributions, secondary market sales, or structured liquidity programs.

Most private equity funds distribute proceeds only when portfolio companies are sold, meaning investors have little control over when they receive returns. Some funds offer periodic liquidity through tender offers, allowing investors to sell a portion of their holdings at predetermined intervals. However, these redemptions are often subject to restrictions, such as gating provisions that limit the percentage of assets that can be withdrawn in a given period.

For those seeking early exits, secondary markets provide an alternative, though often at a discount to NAV. Platforms facilitating these transactions charge fees, and sellers may need approval from the fund’s general partner before transferring ownership. Some funds implement clawback provisions, requiring investors to return a portion of prior distributions if later losses reduce overall fund performance. Understanding these redemption constraints is essential for managing liquidity needs.