A surge of capital into private markets has allowed more companies to stay private longer — and sometimes indefinitely. Over the past few decades, the number of private companies has grown by 43 percent, while the number of public companies has dropped by 35 percent.
Today, many of the most innovative companies in the world (think OpenAI or SpaceX) are raising record amounts in private fundraising rounds, beyond the reach of most everyday investors.
One major driver of this shift is the rise of private equity investing. In the U.S., the number of PE-backed companies has jumped from 1,900 to 11,200 over the last 20 years. Next year, private equity assets under management (AUM) are expected to reach $11 trillion.
As a result, the universe of opportunities available to most individual investors is shrinking. Much of the growth once available through public markets is now being captured by private equity funds. In fact, private equity has outperformed the S&P 500 over 5-, 10-, 15-, and 20-year periods, according to PitchBook data (see graphic below).
Graphic courtesy of FS Investments.
Past performance does not guarantee future performance or success.
The good news: Access to private equity is expanding. Once the domain of pensions and endowments, these funds are increasingly available to individuals, thanks to a growing range of investment vehicles. It’s an exciting moment, but one that comes with unique risks.
In this guide, we’ll break it all down: How private equity works, some of the opportunities and risks it presents, and some of the options available to individual investors today.
What Is Private Equity?
At its core, private equity means investing in privately held companies through negotiated deals. These investments typically involve taking an ownership stake and playing an active role in managing and growing the business.
Private equity fund managers — often called general partners (GPs) — aim to increase the value of their portfolio companies during the time they own them. They typically advise management, shape strategy, and may even step in to run the business directly.
Tactics aimed at driving performance vary but can include hiring or replacing executives, acquiring complementary businesses, refining go-to-market strategies, launching new products, improving operations, or restructuring the company’s balance sheet.
To realize potential returns, private equity funds typically need an “exit,” or a liquidity event. That could mean selling the company to a larger corporation (a strategic buyer), another private equity firm (a financial sponsor), or taking the company public through an IPO.
Why Invest in Private Equity?
Private equity advocates often point to three possible advantages: (1) Larger Investment Universe, (2) Potential for Compelling Returns, and (3) Diversification.
- Larger Investment Universe: As discussed, private markets have grown significantly over the past three decades, while public markets have contracted. In 1996, there were 7,300 publicly traded companies in the U.S.; today, there are around 4,300. Of companies with $100 million or more in revenue, 81 percent are private. Expanding your portfolio into private equity, in theory, gives you broader access to the range of companies across the economy.
- Potential for Compelling Returns: Over the past 25 years, the Global Private Equity Index has outperformed the MSCI World Index by more than 500 basis points annually on a net basis, according to KKR. Supporters of private equity also point out that PE-backed companies, on average, deliver higher growth and stronger margins than their publicly traded counterparts.
- Diversification: Private equity has historically shown lower correlation with public markets than stocks or bonds. Private equity can also give investors exposure to companies at different stages of the life cycle, offering access to a range of growth trajectories., It's important to note, however, that diversification does not guarantee investment returns and does not eliminate risk of loss.
Graphic courtesy of BlackRock. As of February 24, 2025.
Like any investment, private equity carries its own set of risks. These can vary widely depending on the fund’s strategy, as detailed below. Broadly speaking, though, private equity risk tends to fall into three main categories:
Once again, these risks broadly fall into three categories: (1) Operational & Market Risk, (2) Illiquidity, and (3) Capital (or Financial) Risk.
- Operational & Market: Operational challenges — such as poor leadership, weak processes, or inefficient systems — can create risks even for otherwise strong portfolio companies. Likewise, market headwinds, from macroeconomic shifts to changes in consumer behavior, can significantly impact performance. These operational and market risks are inherent in every private equity investment.
- Illiquidity: Most private equity investments are illiquid. They’re typically made through closed-end funds with multi-year lockup periods, meaning investors can’t access their capital until the fund exits, via a sale or IPO. While some newer vehicles offer periodic redemptions and a secondary market exists, overall liquidity remains far more limited than in public markets.
- Capital: Risk in private equity often stems primarily from capital structure. These investments are typically financed with significant debt, which can boost returns but also magnify losses and increase the risk of default. The “high risk, high reward” dynamic generally applies across private markets, but it's especially relevant in private equity.
It's important to generally remember that these investments are speculative and involve substantial risk. Investors should not invest unless they can sustain the risk of loss of capital, including the risk of total loss of capital.
What Types of Private Equity Investments Exist?
Within private equity, there are a range of strategies that align with different stages in a company’s life cycle, from early-stage startups to mature enterprises. Each strategy comes with its own potential rewards and risks.
Graphic courtesy of Stepstone.
Here’s a look at the most common strategies:
- Venture Capital: These funds typically make minority investments in startups and hold a broad portfolio of companies. Portfolio companies are often early-stage businesses with unproven models, still developing products or services and not yet generating revenue or profit. These investments are common in high-growth sectors like technology and life sciences.
Failure rates are high, but the potential upside from a few standout successes can be substantial. The strategy hinges on the idea that a small number of big wins offset the losses. Companies like Airbnb, Uber, and Stripe are well-known examples of venture-backed successes.*
Key Opportunity: Early access to high-growth companies.
Key Risks: High failure rates, long holding periods, and limited liquidity.
Typical Holding Period: 5-10 years
- Growth Equity: These funds typically make minority investments in companies more mature than a startup, but less established and faster-growing than a typical buyout target. Portfolio companies usually operate in established markets with viable products or services, but they’re still young and believed to be positioned for significant growth.
High growth potential may create the opportunity for substantial returns, though typically not as high as venture capital, where entry valuations are lower. At the same time, risk is generally considered more moderate than in early-stage VC. Companies like Alibaba and Adyen are well-known examples of growth equity-backed successes.*
Key Opportunity: Exposure to scaling companies with proven models.
Key Risks: Execution risk, market uncertainty, and limited liquidity.
Typical Holding Period: 3-7 years
- Buyout: Buyout funds typically make majority investments in mature companies—either acquiring private businesses or taking public companies private. General partners often take a hands-on role in reshaping the company’s finances, governance, or operations in an effort to drive value and improve performance.
These deals, most commonly structured as leveraged buyouts (LBOs), are usually financed with a mix of debt and equity. The use of debt may allow firms to amplify potential returns on their equity investment, a strategy known as leveraging.
Because the strategy relies heavily on debt, potential returns can be significant — but so can risk, particularly if the company underperforms or faces a downturn. Well-known examples of successful LBOs include Hilton Hotels, Dell, and Heinz.*
Key Opportunity: Ownership in established companies with potential for enhanced value.
Key Risks: Financial risk due to high debt levels, operational challenges, and limited liquidity.
Typical Holding Period: 4-7 Years
There are other private equity strategies as well, such as distressed debt investing, which involves buying the bonds of companies that have filed for bankruptcy or are at risk of doing so. However, these strategies make up a smaller portion of the overall private equity universe.
How to Invest in Private Equity?
Historically, private equity funds raised capital from institutional investors and family offices. Some allowed individuals to participate, but minimum requirements were steep — often $5 million or more. These investors serve as limited partners (LPs), whose capital is pooled, invested, and managed by the fund’s general partners (GPs).
These funds typically hold a portfolio of private companies. Some focus on specific sectors or strategies, like life sciences venture capital or middle-market buyouts, while others take a more generalist approach, spanning industries and stages.
Graphic courtesy of KKR.
Traditional private equity funds require investors to commit capital for the full life of the fund, typically 10–12 years. This includes an investment period, when GPs source and deploy capital, followed by a harvest period, of exits like sales or IPOs.
As private markets have grown, so has private equity’s appetite for capital. Increasingly, some firms are turning to new sources of funding, including a broader pool of individual investors. Platforms like Crowd Street are helping expand access, offering accredited individuals a way into private equity funds with minimums as low as $25,000.
For individual investors, private equity may present a compelling opportunity to access a fast-growing segment of the economy, one that has long been primarily reserved for institutions and the ultra-wealthy. It offers the potential to invest in some of the most innovative companies in the world.
That said, private equity also carries real risks — operational, financial, and structural — that must be carefully considered. Doing your homework, understanding the structure of each deal, and aligning investments with your risk tolerance are essential steps before getting started.
For more on Crowd Street’s private equity solutions, check out our available offerings. For more market insights, visit our Member Resource Center.
*Past performance is not a guarantee of future results or success.
