Private equity ownership probably isn’t the first thing that comes to mind when considering ways to even out the ups and downs of your retirement account, especially in a volatile market. There is a lot of confusion and misperceptions surrounding owning private equity. In part because who owns it and why they own it has changed over the years.

At Metcalf Partners Wealth Management, we have assisted certain clients of ours for some time now with the purchase of particular private equity investments for their long term investing goals. Typically, the goal being to produce equity-like returns and lower correlation in a portfolio, which in turn, could lower overall the portfolio’s volatility.

To better understand private equity ownership and its role in financial planning, let’s answer four frequently asked questions.

What is private equity?
In the investment world, most people hear about stocks that are traded on an exchange as a publicly traded company. These stocks make up the S&P 500, Dow Jones Industrial, Russel 2000, and other stock indexes that receive news coverage. In contrast to publicly traded stocks, there are companies that do not trade on an exchange. Instead of being owned by shareholders (who bought company stock), these companies are owned by individuals, private equity funds, hedge funds and other private investors.

Isn’t private equity investing only for “wealthy” people?
Ten to 15 years ago, the answer would’ve been yes. And even today, many private equity funds require a minimum investment of $10 million or more.

However, now there are private equity funds that will allow retail investors (meaning not “wealthy” in the Great Gatsby sense) to invest $50,000 or less in a private equity fund, if you meet the net worth and/or income requirements to invest in the fund. An intermediary who raises a large amount of capital from retail investors and then takes that pool of money to invest in a private equity fund usually makes this possible.

The process might sound daunting to someone who is unfamiliar with it, but in reality, you can hold the fund like an investment account. You receive monthly or quarterly statements, as well as communications as to what the fund owns, what has been bought, what has been sold and how the fund is performing.

Is investing in private equity as risky as investing in publicly traded stocks?
The question here really is whether you can you lose money investing in private equity. The answer is most definitely yes, just like publicly traded stocks.

The difference is that publicly traded stocks can significantly move up and down in price based on emotion and investor sentiment while private equity investment’s value is based solely on the appraised value of the underlying assets. Can this move up and down? Yes, it can, but it historically has not moved up and down as rapidly or as often as publicly traded stocks.

It is important to know, however, that private equity also is not as liquid as a publicly traded stock. It is not as easy as jumping into a brokerage account and making a trade. Many private equity funds allow for quarterly redemptions, and only allow a certain percentage of the fund to be liquidated each quarter. Because they have most of their cash deployed in private companies, they must control how much is redeemed each quarter, so it is typically better suited for a long-term investor.

Why would I invest in private equity?
Typically, an investor puts money into private equity with the goal to lower the correlation and volatility of their investment account. Many private equity funds have provided similar returns to publicly traded mutual funds with the aim of providing much less volatility over time. This could help your overall portfolio fluctuate less with day-to-day market sentiment and emotion.
As mentioned before, invested money is not as liquid, so it is important to invest funds that you plan to invest for the long term. Because of limited immediate liquidity, many states will only allow an advisor to invest a specific percentage of a client’s investments into private equity.

Private equity may be something to look into if you are an investor moving toward retirement or already retired who is:

• Looking to lower volatility and correlation in your account
• Have a portion of your account that you want to invest for the long term
• Have a risk tolerance for equity investments

Ask your CFP® or financial advisor for more information or you can give us a call at Metcalf Partners Wealth Management to learn more.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We suggest that you speak with a tax professional about your individual situation before taking any actions.

There is no guarantee that any investment will achieve its objectives, generate profits or avoid losses. Investing in private equity is subject to significant risks and may not be suitable for all investors. These risks may include limited operating history, uncertain distributions, inconsistent valuation of the portfolio, changing interest rates, leveraging of assets, reliance on the investment advisor, potential conflicts of interest, payment of substantial fees to the investment advisor and the dealer manager, potential illiquidity and liquidation at more or less than the original amount invested.