Private equity, once the preserve of the wealthy, is being made available to the retail investor i.e. ordinary investors and pensions of those who aren’t wealthy.
Private equity is investing in private companies (not listed on the stock exchange) that are seeking to raise capital to grow, sometimes through expansion or buy outs. These companies tend to be established companies and are not start ups. The funding is through private equity firms and in return, the private equity firm receives an equity stake in the company.
There is $26 trillion in retirement accounts in the US and the private equity companies want access to them. Private equity investments are usually made by large pension funds, endowments, sovereign wealth funds and high net worth individuals. With trillions of dollars already tied up in existing deals, PE companies are looking for alternative sources of funds and what better way than to get access to trillions sitting in retirement accounts.
It provides an element of diversification for investors. The companies that you are investing may be undertaking projects or expansions into areas that may not be available through listed companies. And with a slow down of IPOs, you may also get the opportunity to invest in great companies that need investment to grow but aren’t raising funds by listing on the stock exchange.
There is also the promise of superior returns. But isn’t that the promise of everyone who is seeking to raise funds!
Private equity investment is very illiquid. You are investing in unquoted companies so they cannot be traded like a normal stock or liquid index fund. Investors should be prepared to invest for at least ten years.
The private equity funds that are being offered through fund managers will have an element of liquidity to them by holding cash reserves. I imagine it will be like property funds. If there is a load of withdrawals from the fund, the cash element will run low and they will put a moratorium on withdrawals. It will be in times of downturns that there is a rush to move to cash and investors will find themselves unable to sell.
Pension fund investors may also look to reduce their risk exposure in the approach to retirement or post retirement and be unable to sell their private equity investment. I have a client who is in a private equity fund for over 10 years. He has since retired and his ARF is with another provider but we couldn’t sell or move the private equity investment, so he has a standalone ARF that only contains the private equity investment.
The fees for private equity is a lot more expensive than your standard fund. Investors should expect to pay 1.5% – 2% (this is in addition to the pension charges that you are already paying). There is also bonus payments if the fund achieves a certain return (PRSAs do not allow investments that pay bonus payments to the fund manager). If you are a price conscious investor, private equity isn’t for you.
Private equity was restricted to the wealthy for a reason, they could afford to put a portion of their wealth into a long term investment that they couldn’t access. They could also afford the risk that if it didn’t work out, it wouldn’t impact on their lives. This is not the case for retail investors, and there will certainly be cases in the future of people who put all of their retirement funds in private equity, only for it to bomb and the pensioner losing all their retirement fund. Or the expected investment term to be extended and someone is unable to retire as there is no liquidity in their pension funds.
It is not an investment we will be recommending to our clients.
Steven Barrett
14 July 2025