How Retail Investors Can Now Tap Into Private Equity

Key Takeaways 

• Increasingly, PE is accessible to everyday retail investors, who account for half of all wealth globally.

• Private equity refers to investment funds that purchase and manage companies, then sell them.

• Some of the industry’s largest funds are pushing to improve access to more retail capital. 

Historically, private equity (PE) has been the exclusive province of high-net-worth individuals and institutional investors. That is no longer the case. Increasingly, PE is accessible to everyday retail investors, who account for half of all wealth globally, according to Bain & Company in a 2023 global private equity report.

Such investors can use PE, an alternative asset class, to diversify their holdings. Indeed, there is burgeoning interest in options for retail participation, including in private markets in general. Due to their indirect correlation to constantly fluctuating public markets, private markets are less volatile.

Having said that, here is how retail investors can tap into private equity.

Demystifying Private Equity

Private equity refers to investment funds that purchase and manage companies, then sell them. These funds are run by PE firms largely for accredited and institutional investors, although retail investors now have real options.

PE funds may wholly buy public or private companies or, as part of a consortium, invest in buyouts. Typically, they have no position in companies listed on a stock exchange.

While PE is often categorized with venture capital, it mostly invests in mature company buyouts. By contrast, venture capital focuses on startups. Private equity funds and firms manage their portfolio companies to heighten their value. They also may seek to derive value before, in the future, exiting the investment.

Opening Up for Retail Investors 

PE funds have had robust returns overall since the last generation, spawning rapid industry growth. Just three years ago, PE buyouts reached a record $1.1 trillion, doubling 2020 totals. Such growth is occurring amid greater allocations to alternative investments. 

Retail investment is part of that growth, due in part to the relatively poor performance of public markets. Individual investors hold about half the global assets under management, amounting to as much as $295 trillion. 

However, there are structural challenges in PE for retail investors — individuals who possess investable assets of less than $1 million. Those barriers include high minimums, lack of transparency, and liquidity. Depending on the PE fund type, investor commitment could be a decade or more. That is more than what many individual investors are used to.

Still, some of the industry’s largest funds are pushing to improve access to more retail capital. Blackstone, for example, says it may increase retail capital from $200 billion to $500 billion. Up to half of new capital raised by KKR is expected to come from the private space.

And there are new avenues for participation, including fund of funds, in which private wealth firms invest on behalf of 100 clients in a single deal, acting as general partners. With this approach, the number of advisors that must be targeted drops, along with the number of individual relationships that must be formed. Both sides must conduct due diligence, however.

Although less common, there are also secondary market platforms that purchase existing shares in PE funds. Increasingly, investors are considering secondary trading in private equity, involving companies that have not yet gone public. 

Many such companies are in early-growth stages, potentially opening up prospects for benefiting from that increase in value. PE secondary trading digital marketplaces permit investors to purchase and sell shares in private companies. Transactions are completed faster than possible on public exchanges and fees are relatively lower.

Then there are regulation changes. Initiatives such as Regulation A+ are opening up some direct investments. The reference here is to an exemption that permits small businesses to sell shares to the general public, allowing nearly anyone to invest in a company through crowdfunding.

Regulation A+ permits crowdfunding platforms and new businesses to raise needed funds through accredited as well as non-accredited investors. In addition, it allows companies that seek equity funding to advertise their offerings publicly. 

Regulation A+ permits all investors to participate, whereas previously, most available exemptions let companies only accept investments from accredited investors.

Exploring Alternative Investments 

Alternative investments are increasingly popular. After all, the S&P 500 index has dropped some 15% this year (2024) to date, prompting more investors to turn toward alternative assets — those other than stocks and bonds. Some $6.2 trillion in alternative assets are under management globally.

Such assets can provide higher returns than stocks, help reduce overall portfolio risk, and can shield against inflation. After all, over nearly the last two decades, private markets have outperformed stocks in every market downturn.

The alternative investment platform, Yieldstreet, is helping to lead the way. To date, the platform has seen some $4 billion in investment activity. It also offers the broadest selection of alternative asset classes available.

Those highly vetted offerings include alternatives such as transportation, infrastructure, and real estate, which remains a popular way to generate income and grow wealth. Generally, such investments require a high degree of market knowledge. With passive offerings such as its Growth & Income real estate investment trust, Yieldstreet does all the heavy lifting so the investor does not have to.

Entry minimums are as low as $10,000. As it is, Yieldstreet has closed some $900 million across more than 100 deals in commercial real estate transactions.

Yieldstreet also has unique private credit funds available, including exposure to consumer loans used for wellness products and services, as well as loans backed by powersports vehicles. Further, investors seeking exposure to a diversified amalgamation of collateralized loan obligations have Yieldstreet’s diversified CLO portfolio as an option.

Every investment carries risk. However, building a portfolio that includes private assets not only potentially opens up new income streams, but it provides a broader range of diversification options. A recent Financial Planning Association survey found that among those who used alternatives for clients, 55% cited portfolio diversification as a goal. Some 41% sought risk mitigation.

Getting Started

The primary draw of alternative investing is its lower correlation to volatile stocks and bonds. Not only can alternatives such as private equity potentially provide lower volatility, but the possibility of higher returns overall. Note that these are possibilities — not certainties. 

As with any investment, due diligence is necessary before taking positions in alternatives, some of which have lockup periods and are illiquid. It is best to seek professional advice to gain a thorough understanding of the risks and suitability of these asset classes, and their potential alignment with personal goals and time horizons.

There are various ways to enter the alternatives market, including through a broker. Investments are also offered by standalone companies such as Yieldstreet. In general, the investor will need to sign up with the platform, link a bank account for fund transfers, choose an investment, and transfer funds.

For some offerings, the investor will have to provide proof of their accredited status (having a net worth of more than $1 million, excluding their primary residence, and annual income exceeding $200,000). Additional bank or tax statements may be required.

Minimum deposits run the gamut, from $10 to $20,000 or more. With some platforms, there is a minimum for each project. Generally, minimums are relatively accessible.

When considering investing in alternatives, many advisors recommend establishing a plan that factors in the investor’s goals, timeline, and risk level.

For its part, Yieldstreet offers opportunities to earn secondary income, diversify holdings, and protect against economic instability. It also offers an array of asset classes for accredited and non-accredited investors that can shield against market volatility. 

For example, in lieu of signing up with an exclusive, and pricey, hedge fund, Yieldstreet brings the asset classes to the investor digitally. Minimums start at just $10,000.

Not only do Yieldstreet investors gain access to a wide variety of alternative asset classes, but they can invest using a self-directed IRA or trust. And because Yieldstreet vets each deal, fewer than 10% make its platform. When engaged, such offerings also serve the essential purpose of portfolio diversification, which is a critical pillar of long-term investing success.

Alternative Investments and Portfolio Diversification 

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Retail capital is gaining traction in PE, and projections are that it will ultimately become a key fundraising source for alternative managers. After all, about a third of advisors in 2022 were either investing in seeking alternative investments, including private equity. In the past, such opportunities were limited for individual investors. There are now more offerings available for retail investors, including in the PE space.