How to Invest in Private Markets: Step-by-Step

Private markets involve assets not traded on public exchanges, such as private companies, real estate, and infrastructure projects, distinct from publicly traded stocks and bonds. Investing in private markets offers individuals opportunities for portfolio diversification, offering different return profiles than public markets. They also provide access to early-stage, high-growth companies typically unavailable to public investors.

Understanding Private Market Investment Types

Private equity is a prominent category within private markets, involving direct investment into private companies or the acquisition of public companies that are then delisted. Venture capital, a sub-segment of private equity, focuses on providing financing to early-stage, high-growth companies with significant potential. Growth equity, another private equity strategy, involves investments in more mature companies seeking capital for expansion or strategic initiatives without a change of control. Buyout funds, a common private equity type, acquire established companies, often using significant borrowed money, with the aim of improving operations and eventually selling them for profit.

Private debt, also known as private credit, involves direct lending to companies rather than through traditional bank loans or public bond markets. This asset class provides capital to businesses, often in exchange for interest payments, and can include various forms such as direct lending, mezzanine debt, or distressed debt. Private debt investments are less correlated with public market performance and can offer attractive risk-adjusted returns through consistent income streams.

Private real estate investments involve direct ownership or participation in physical properties rather than publicly traded real estate investment trusts (REITs). These investments span various property types, including multifamily housing, office buildings, industrial facilities, and retail spaces. Returns are generated through rental income and property appreciation upon sale, and these investments often require active management.

Infrastructure investments in private markets focus on essential facilities and systems that support a society or economy, such as transportation networks, utilities, and communication systems. These investments provide stable, long-term cash flows due to their essential nature and potential government backing or long-term contracts. Private infrastructure can include both existing assets (brownfield) and new developments (greenfield). This category offers diversification benefits and can provide a hedge against inflation.

Accessing Private Market Investments

Individuals can gain exposure to private markets through several mechanisms, with private funds being a common avenue. Private equity funds, venture capital funds, and private debt funds pool capital from multiple investors to make a diversified portfolio of private investments. These funds are managed by general partners (GPs) who identify, execute, and manage the investments on behalf of the limited partners (LPs), who are the investors. This structure allows investors to access private opportunities difficult to pursue individually.

Feeder funds serve as an intermediary vehicle, aggregating smaller investments from multiple individuals into a larger sum that can then be invested into a master private market fund. This mechanism helps lower the effective minimum investment threshold for individual investors, making top-tier private funds more accessible. Online platforms and wealth managers increasingly offer access to private markets through these feeder fund structures.

Direct co-investments involve an investor placing capital directly into a specific private company or asset alongside a private fund manager. Less common for individuals due to substantial capital and due diligence, co-investments offer greater control and potentially lower fees, but lack pooled fund diversification.

Newer platforms and crowdfunding avenues have emerged, democratizing access to private markets. These platforms facilitate investments in private companies or real estate projects with lower minimums than traditional funds. Some platforms may offer access to semi-liquid or perpetual funds, which provide periodic liquidity windows, a departure from the long lock-up periods of traditional private funds. These evolving access points broaden participation beyond large institutions and ultra-high-net-worth individuals.

Prerequisites for Private Market Investing

Investing in private markets requires meeting specific regulatory criteria, primarily the “accredited investor” status, as defined by the U.S. Securities and Exchange Commission (SEC) under Regulation D. For individuals, this means having an annual income exceeding $200,000 ($300,000 with a spouse or spousal equivalent) for the two most recent years, with a reasonable expectation of the same for the current year. Alternatively, an individual can qualify with a net worth exceeding $1 million, alone or jointly with a spouse or spousal equivalent, excluding their primary residence. Certain professional certifications, such as a Series 7, 65, or 82 license, also confer accredited investor status. This status exists because private market offerings are exempt from extensive public market disclosure requirements, as accredited investors are presumed to better assess risks.

A characteristic of private market investments is their illiquidity, meaning capital is locked up for extended periods, often 5 to 10 years or more. Unlike public market securities that can be bought and sold daily, there is no active secondary market for private assets, making it difficult to exit an investment prematurely. Investors must be prepared for this long-term commitment and ensure they won’t need the capital during the investment horizon.

Thorough due diligence is essential before committing to a private market investment. This involves researching the fund manager’s track record, understanding their investment strategy, and evaluating their team’s expertise and stability. Investors should scrutinize past performance, including consistency and adherence to objectives. This assessment helps determine the manager’s ability to generate returns and manage risks.

Private funds involve a two-part fee structure: management fees and carried interest. Management fees are annual charges paid to the fund manager to cover operational expenses, ranging from 1.5% to 2% of committed capital during the investment period. After the initial investment period, these fees may decrease or be calculated based on invested capital or net asset value. Carried interest, or “carry,” is the performance-based component, representing the fund manager’s share of the profits. This is set at 20% of net profits, but only after a minimum return, known as a “hurdle rate” (around 8%), has been achieved for the investors.

Investors in private funds commit a total amount of capital, but it is not all requested upfront. Instead, capital calls are issued by the fund manager as needed to fund new investments or cover expenses over time. This means investors must have the committed capital readily available when a capital call notice is issued, within a 10 to 14-day window. Understanding this drawdown mechanism is important for managing personal cash flow and ensuring compliance with the investment agreement.

Navigating the Private Market Investment Process

Once an investor has identified a suitable private market opportunity and confirmed they meet all the prerequisites, the actual investment process begins. This starts with the fund or platform selection, which involves reviewing offering documents and terms for specific funds that align with the investor’s financial goals and risk tolerance. This confirms the opportunity aligns with the investor’s portfolio strategy.

The subscription process is the formal commitment of capital to the private fund. This involves completing and submitting subscription documents or agreements, which are legally binding contracts outlining the terms of the investment. These documents detail the investor’s committed capital, the fund’s structure, fee arrangements, and other operational provisions. The investor is required to provide accurate financial and personal information to verify their accredited investor status during this phase.

Following the initial commitment, investors receive notifications for capital calls as the fund identifies and executes new investments. These notices specify the amount of capital requested, a percentage of the investor’s total commitment, and the deadline for transfer. Investors are responsible for fulfilling these requests by transferring the specified funds to the fund’s designated account within the stipulated timeframe, a few weeks.

Throughout the investment’s life, investors receive regular monitoring and reporting updates from the fund manager. These reports include financial statements, performance metrics, and updates on portfolio companies or assets. The frequency of these reports can vary, but they are designed to inform investors about investment progress and valuation. This transparency allows investors to track their capital’s deployment and performance.

Finally, distributions represent the return of capital and profits to investors from the fund. As portfolio companies are sold or assets generate income, the fund manager will disburse proceeds to investors, after deducting fees and expenses. The timing and frequency of distributions are unpredictable due to the illiquid nature of private assets and depend on the fund’s investment and exit cycles.