How to invest in private equity: the six routes, what they cost, and who is allowed in

This guide is for someone with money to invest who keeps hearing "private equity" and wants to know what the words mean before talking to anyone. By the end you will know the six ways money gets into private companies and what each costs. Also: how long it is locked up, who is allowed in, and what to ask before you sign. It explains; it does not tell you where to put your money. Acquisitions.com is an advisory firm, not a fund, a broker-dealer or a registered investment adviser.

What "private equity" means here

Private equity is ownership of companies that are not traded on a stock exchange. A fund or a group of investors buys a business, tries to make it worth more over several years, and sells it. The money is tied up until the sale. The phrase covers a buyout fund buying companies worth billions, an independent sponsor buying one company worth $20 million, and a roll-up buying several small businesses in one sector. The mechanics are the same; the minimums, the people and the risks are not.

Who is allowed to invest: the SEC's two tests

Most private equity is sold without a public registration, so the law limits who can buy it.

Accredited investor. The SEC's accredited investor page says an individual qualifies with a net worth above $1 million excluding the primary home, alone or with a spouse or partner. Or income above $200,000 ($300,000 jointly) in each of the last two years and the same expected this year. Holders of a Series 7, 65 or 82 licence also qualify, as do entities with more than $5 million in assets.

Qualified purchaser. A higher bar, used by funds that rely on section 3(c)(7) of the Investment Company Act. In an SEC staff letter on the definition, a natural person must own not less than $5,000,000 in investments. A person investing for others needs $25,000,000. Big institutional funds usually take qualified purchasers only. If you meet neither test, only the listed routes (interval funds, public PE firms) are open to you.

Routes 1 and 2: PE funds, and the feeders and platforms that reach them

A PE fund is the classic route. You sign a limited partnership agreement, commit a sum, and the fund "calls" it in pieces as it buys companies. A Canadian law firm, MLT Aikins, describes the usual timeline. That is a ten-year term, extendable a year at a time, and a commitment period of four to six years. The minimum is set by each fund and is usually out of reach unless you are a qualified purchaser. You have no say in which companies are bought and cannot withdraw. You can only sell your stake to another investor at a discount.

A feeder fund or platform pools many smaller investors into one slot in a big fund. Private banks have done this for decades; online platforms now do it for accredited investors with smaller cheques. The platform sets its own minimum and adds its own fee on top of the fund's, so read both fee tables. You get access and give up a layer of cost and distance: you are the platform's client, not the fund's limited partner.

Route 3: Interval funds and listed PE firms

These are the routes open to anyone with a brokerage account.

Interval funds are registered funds that hold private assets. The SEC's investor bulletin on interval funds explains the catch. The fund offers to buy shares back only every three, six or twelve months. It buys back only 5% to 25% of all shares at each offer and fills requests pro rata when too many want out. It may deduct a repurchase fee of up to 2%. You can buy any day; you cannot sell any day.

Listed PE firms are the managers themselves, traded on an exchange. A share gives you a slice of the manager's fee and carry income, not of the companies in its funds. It is liquid, needs no accreditation, and moves with the stock market.

Routes 4 and 5: Deal-by-deal SPVs and search funds

An independent sponsor finds a company, negotiates the purchase, then raises the money for that one deal, usually through a special purpose vehicle (SPV). There is no fund and no blind pool: you see the company before you commit. Law firm McGuireWoods surveyed nearly 300 such deals closed in 2018 to 2021 in its Independent Sponsor Deal Survey. More than 75% of targets were worth $10 million to $75 million. Nearly 80% of sponsors took closing economics of 1% to 2.49% of the company's value. 60% took a management fee of 5% of trailing EBITDA. After the second return hurdle most carried interest fell between 20% and 24.99%.

A search fund is a small pool that pays a searcher, often a recent MBA, to spend about two years finding one business to buy and run. Investors in the search get the right to invest in the purchase. Stanford Graduate School of Business's 2024 Search Fund Study covers 681 funds in the US and Canada. It reports an aggregate pre-tax IRR of 35.1% and 4.5 times capital. That average hides searches that never buy anything and some that lose everything.

In both, the investor is usually accredited and the money is tied up until that one company is sold. One deal means one outcome.

Route 6: Small-business roll-ups

A roll-up buys several small businesses in one sector (home services, agencies, healthcare practices) and runs them as one larger company. The group usually sells for a higher multiple than its parts. It is private equity at the smallest end, and where Acquisitions.com works. Moran Pober built and sold Rollups.com. The firm gives accredited investors deal-by-deal access to AI-powered roll-ups, described on our investor page. Acquisitions.com is an advisory firm, not a broker-dealer or a lender; financing comes from third-party lenders and investors.

How one of these businesses is bought is in how to buy a business. If you would rather run a roll-up than fund one, read how to start a private equity firm.

The six routes side by side

Interval-fund figures are from the SEC bulletin above; each offering document overrides the rest.

Fees: 2-and-20 and the promote

Most private funds share one fee shape. The SEC's page on hedge funds describes it: a management fee of 1% to 2% a year and a performance fee of 15% to 20% of profits, often behind a hurdle rate and a high-water mark. In private equity the shorthand is "2-and-20". That is 2% of committed capital a year and 20% of the gains, usually after investors have their capital back plus a preferred return.

In deal-by-deal structures the 20% is called the promote or carried interest. It often steps up as the deal clears higher hurdles, the "variable with hurdles" model McGuireWoods found in 61% of independent sponsor deals. Cooley's primer on fund structure explains where each fee goes. The management fee goes to the management company that employs the team, the carry to the general partner, which also puts in its own money, typically 1% to 2% of the fund.

Returns: the J-curve, lock-ups, and IRR versus MOIC

Private equity returns are shaped like a J. In the first years you pay fees and the fund marks early purchases at or below cost, so your reported return is negative. Then companies are improved and sold, cash comes back, and the curve turns up. A fund showing a loss in year two is normal. One showing a big gain in year two is marking its own portfolio up, and you should ask how. The lock-up follows: capital is called over four to six years and returned over the following five or more.

Two numbers describe every result, and they can disagree. MOIC (multiple on invested capital) is money back divided by money in. IRR (internal rate of return) is the yearly rate that turns the money in into the money out over the time it took. One example shows the difference: you invest $100,000 and get back $200,000. The MOIC is 2.0x whether that took three years or seven. The IRR is about 26% a year if it took three years and about 10% a year if it took seven.

So a sponsor can quote a high IRR on a quick flip that made little money, or a high MOIC on a slow deal that beat nothing. Ask for both, and for DPI, cash distributed divided by cash paid in: the one number that cannot be a valuation opinion. The Institutional Limited Partners Association's performance template, rolling out from 2026, standardises how funds report IRR and multiples, gross and net of fees.

The risks, and what to ask a sponsor

• You can lose it all. One company, one sector, one operator. SPVs, search funds and roll-ups have no diversification unless you build it across several.
• You cannot get out. No private route lets you sell when you want. Interval funds let you sell some, sometimes.
• The numbers are the sponsor's until a sale. Interim returns are valuations, not cash.
• Fees compound. Two layers in a feeder, or a 5% management fee on a small company's EBITDA, take a real share of the return.
• Debt. Most buyouts use borrowed money. It raises returns when things go well and wipes out the equity first when they do not.
• Sponsor risk. In small deals the sponsor is the business. Check their record and how much of their own money is in.

Questions to ask before you invest:

1. How much of your own money is in this, in dollars and as a share of the total?
2. What are all the fees, including closing, monitoring and expenses charged to the company?
3. Show me every prior deal: money in, money out, dates. What is the DPI today?
4. How much debt is on the company, and which covenant would break first?
5. Who holds the money and the books: which administrator, auditor and law firm?
6. Are you registered with the SEC or a state as an investment adviser, or exempt, and under what rule?

A sponsor who will not answer these in writing has made the decision for you.