Small Business Private Equity | AEA Investors (2024)

FAQs

How can small investors invest in private equity? ›

You can purchase shares of an exchange-traded fund (ETF) that tracks an index of publicly traded companies investing in private equities. Since you are buying individual shares over the stock exchange, you don't have to worry about minimum investment requirements.

Many private equity funds require a minimum commitment of $10 million or more. Through Morgan Stanley, however, you can participate in many of these funds for a minimum of $250,000.

As an experienced entrepreneur, you're well aware of the risks and rewards that come with starting a business. You're also familiar with the role that private equity (PE) can play in funding a new venture. But what you may not know is that there's a growing trend of PE firms investing in early-stage startups.

In addition to meeting the minimum investment requirements of private equity funds, you'll also need to be an accredited investor, meaning your net worth — alone or combined with a spouse — is over $1 million or your annual income was higher than $200,000 in each of the last two years.

Don't invest unless you're prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong.

80% of your returns will usually come from 20% of your investments. 20% of your investors will usually represent 80% of the capital. For portfolio companies. 20% of your customers will usually represent 80% of your profits.

Key Takeaways

Two refers to the standard management fee of 2% of assets annually, while 20 means the incentive fee of 20% of profits above a certain threshold known as the hurdle rate.

The Rule of 72 is a convenient method to estimate the approximate time for invested capital to double in value. By merely taking the number 72 and dividing it by the rate of return (or interest rate) expected to be earned, the output is the approximate number of years for an investment to double.

Private equity (PE) firms deal with bigger companies, like buying a whole castle. Venture capital (VC) focuses on startups, more like a lemonade stand. Since PE deals are bigger, they have more money to pay their people. So, PE jobs generally pay more than VC.

Do PE investors get dividends? ›

Making Money the Old-Fashioned Way With Debt

Private equity managers can also cause the acquired company to take on more debt to accelerate their returns through a dividend recapitalization, which funds a dividend distribution to the private equity owners with borrowed money.

Private equity owners make money by buying companies they think have value and can be improved. They improve the company or break it up and sell its parts, which can generate even more profits.

A business plan and setting up the operations are also key steps, as well as picking a business structure and establishing a fee structure. Arguably the toughest step is raising capital, where fund managers will be expected to contribute 1% to 3% of the fund's capital.

Private equity firms normally charge annual management fees of around 2% of the committed capital of the fund. When considering the management fee in relation to the size of some funds, the lucrative nature of the private equity industry is obvious.

$146.5bn raised in Q4 2022. 213 funds closed in Q4 2022, marking the lowest number of funds closed in any quarter over the last five years. fewer private equity funds in Q1, with the average fund size reaching over $1bn for the first time in the last five years.

A more direct option for retail investors with smaller portfolios is to pool their resources to invest directly in private equity deals. Several companies offer this service, bringing personal investors' small checks together.

Most private equity money comes from institutional investors, such as pension funds, sovereign wealth funds, endowments, and insurance companies, although many family offices and high-net-worth individuals also invest directly or through fund-of-funds intermediaries.

It is rare, but possible, for retail investors to access venture capital. Most venture capital investments are restricted by law to accredited and institutional investors. This is because these funds invest in private equity stock, which is itself restricted from the public market.

A traditional private equity firm is an investor that raises private equity funds to acquire a majority stake in companies. These investors are known for using a large amount of borrowed money to fund the purchase, aggressively increasing revenue and margins, then exiting through a private sale or IPO.