How to Deal With Private Equity Funds

Private equity funds offer investors both the potential for high rewards (approaching 25 to 30 percent return on investments) as well as plenty of risk (poorly managed equity funds can literally lose all of your money). Learning how to find and manage these funds is critical if you are interested in private equity investing.

Difficulty: Easy

Instructions

Things You'll Need:

• Print or electronic copies of fund rules and regulations
• Prospectus for each candidate equity fund
• Money to invest (generally no less than $1,000 but sometimes minimum is much higher)
• Investment software to track results (optional, but recommended)

1. Shop around for equity funds that not only have performed well in the past but also invest in risks that you are comfortable with. Get real numbers, like the average rate of return for past five years, and examine past investment decisions.

2. Take the time to scan the market and talk to experts in the field before committing yourself. Private equity funds that invest in start-up companies or venture capital affairs are typically more risky than funds that deal with established companies.

3. Once you’ve selected a fund, write down a list of any questions you may still have, and get directed answers from a fund manager. Make sure you’re comfortable.

4. Prepare yourself for long-term investing and understand the rules of the fund. Some long-term private equity funds make it very difficult to liquefy assets early. Some funds require that investors meet certain wealth criteria. For instance, you may need to prove that your net worth is $1.5 million to qualify for the ABC Fund.

5. Monitor your fund and respond to its ups and downs by adjusting the rest of your portfolio.

Tips & Warnings

• You can enter funds in which you are a small fish in a big pond (the fund is dominated by institutional investors) or you can invest in smaller funds tailored more towards individual investors.
• If you have time to research industries and develop relationships with investors, skip pooled investing altogether and shop private companies by yourself. However, while you can save on managerial fees, remember that there is usually a learning curve.
• Create a solid portfolio that provides enough money to cover daily expenses, cash for emergencies (typically two to six months worth of your living expenses), and “safe” investments (small but guaranteed returns).
• Earmark a certain amount of funds for more risky investing. This should be cash that you can lose without upsetting your other finances.
• Do not count on the money locked up in your equity fund for present and short term expenses. If even you can partially liquidate your investment, you’ll have to sacrifice a lot in the process. Assume, for the short term, that the money does not exist.