How to Invest in Private Equity

Private equity has long been associated with extremely wealthy investors. That is not surprising, because the requirements for investing in private equity made it largely inaccessible for private individuals. But things have changed, and private equity is now available to small investors as well – within limits. This moneyland.ch guide provides the most important information about investing in private equity.

What is private equity?

The term private equity is used to describe an asset class consisting of shares in companies that are not listed on a stock exchange.

Private equity serves as a source of financing for companies that are not cannot or do not want to list their stock on a stock exchange. Private equity is divided into several categories, with differ based on the types of companies and the level of risk. The most important categories of private equity are:

• Venture capital: You invest in startups. This is the riskiest category of private equity because the companies are new and unproven.
• Growth capital: You invest in established companies that are looking to invest in their business – by expanding their production or entering new markets, for example.
• Buyout: This is when capital is used to buy a majority share in a company. That could be the case, for example, when an exchange-listed company will be bought up with the goal of delisting it from the stock exchange.

Which kinds of investors can benefit from private equity?

Private equity is normally best-suited to professional, institutional, or very wealthy investors. That is because it often requires large amounts of capital, and because the complexity of these kinds of investments can make them difficult to understand for inexperienced investors.

Can small investors use private equity as an investment?

Until recently, private equity was scarcely available to regular private investors – at least not directly. Many banks, including UBS and the Zürcher Kantonalbank (ZKB), still only offer private equity to professional and institutional investors. But there are now a few Swiss service providers that let you invest in private equity. This is primarily done using private equity funds.

What are the advantages and disadvantages of private equity funds?

By investing in a private equity fund you invest in a whole portfolio of companies that are not listed on stock exchanges. These mutual funds have several advantages:

• Diversification: The fact that private equity funds invest in many different companies has a positive side-effect in that it spreads out the risk of a company failing.
• Know-how: Inexperienced investors may find it difficult to understand a company’s business model, potential, and risks. With a private equity fund, these tasks are managed by professional fund managers. Important: Even professional management does not guarantee a good return.
• Low entry barriers: You can already invest in a private equity fund even if you only have a small amount of capital for the investment. That makes them accessible to small investors.

The disadvantage of private equity funds is that they have ongoing fees, and these fees detract from your returns. The costs can have a substantial impact on your investment. In addition to the ongoing annual fees charged by the fund, you normally also have administrative fees and one-time sales charges and deferred sales charges when you buy and sell fund shares. Some mutual funds also charge a performance fee based on how their share price develops.

Which private equity funds are there?

There are Swiss financial services providers that offer access to private equity funds specifically to private investors. Examples include the Swiss robo advisor Finpension and Swiss stockbroker Swissquote (as per November 2024).

You can invest in private equity with Finpension by selecting the 100% Private Markets investment focus. If you only want to invest part of your capital in private equity, you can create other investment portfolios with a different investment focus. However, it is not possible to create a single portfolio that includes both private equity and other asset classes.

Table 1: Overview of private equity funds and tracker certificates

Source: Factsheets. Date: November 20, 2024.

The Stableton Unicorn Index AMC available through Swissquote is a tracker certificate and not a mutual fund. This tracker certificate aims to replicate the Morningstar PitchBook Unicorn Select 20 Index that tracks 20 companies funded by venture capital. One of these companies is Chat GPT artificial intelligence developer Open AI (as per November 2024).

Important: A tracker certificate is only a debt claim against the certificate’s issuer. The issuer owns the shares in the underlying companies. Pay attention to counterparty risk. If the certificate’s issuer were to become insolvent, the underlying assets would not be segregated from the issuer’s other assets, so the certificate could become worthless.

Are there any private equity ETFs?

There are a number of exchange-traded funds (ETFs) that you can use to invest in private equity companies. This is an indirect form of investing: You invest your money in the ETF which, in turn, invests it in many different private equity companies that then invest it in companies which are not listed on stock exchanges. Private equity ETFs replicate indexes that track the performance of private equity companies.

The annual fees charged by private equity ETFs (shown as the TER) are lower than those of private equity funds. On the other hand, the fees are higher than those of many other ETFs. By comparison, the cheapest ETFs that replicate the MSCI World global index have TERs of just 0.1 percent. The TERs of ETFs that replicate the Swiss SMI index start at just 0.2 percent.

Table 2: Overview of private equity ETFs

Source: Fund managers and Justetf.com. Date: November 20, 2024.

Investing in ETFs is relatively easy. To buy shares in an ETF, you just need to have a stock brokerage account. When choosing a stockbroker, take time to compare stock brokerage accounts to find the offer with the lowest brokerage and custody fees.

Can I invest in private equity using individual stocks?

You can also buy shares in the stocks of companies that operate in the private equity sector. These companies specialize in private equity investments. But you should be aware that investing in individual stocks can be riskier than investing in one of the private equity ETFs listed in Table 2. Investing in just a few individual stocks exposes you to a high risk of loss.

The Partners Group, a company headquartered in Zurich, is a major player in the private equity sector.

Table 3: The 10 heaviest-weighted stocks in the Xtrackers LPX MM Private Equity Swap UCITS ETF 1C

Source: Fund factsheet. Date published: October 31, 2024. Date recorded by moneyland.ch: November 20, 2024.

Are there any other ways to invest in private equity?

There are alternative ways to invest money in private equity. Some of these are relatively new, digital platforms.

• Tokenization: Various online platforms let you buy tokens that represent participation or ownership in companies – local companies, for example. Examples include the Swiss platforms from Aktionariat and BX Digital. The process of tokenization involves creating a blockchain token that represents an asset. This provides companies with a relatively simple way to raise funding by selling their shares or participation certificates to the general public.
• Crowdinvesting: The principle of crowdinvesting is similar to that of crowdfunding. Many different people and other entities invest in a company together. It is often possible to invest amounts as low as a couple of francs. In exchange, you normally receive a corresponding share in the company or an entitlement to participate in the company’s profits. Conda and Seedmatch are two examples of crowdinvesting platforms.
• OTC trading: Some banks offer over-the-counter (OTC) trading. The OTC-X service from the Berner Kantonalbank is one example. You can use OTC trading to buy and sell shares in companies that are not listed on any stock exchange. Many of the stocks available through OTC services belong to smaller but relatively well-established companies.

What are the risks and possible problems?

Investing in private equity exposes you to substantial risks. There are many different reasons for this:

• Complexity: Private equity is a complex asset class that requires a great deal of knowledge. Do not invest in things that you do not understand. True to that rule of thumb, it is always advisable to take a close look at each company before you consider investing in it.
• High risk of loss: The risk of a company you invest in going bankrupt is very real. That is especially true of venture capital, as startups have a high risk of failure. Make sure you are aware of that danger before you invest any substantial amount of money. You can reduce the risk of loss by investing your private equity capital in a broadly-diversified portfolio – a private equity fund or ETF, for example.
• Low liquidity: Unlike stocks traded on stock exchanges, selling shares in non-listed stocks can be difficult. Private equity mutual funds may have limitations for selling fund shares that can limit your ability to access your money in full at any time. For that reason, you should only invest money that you can afford to do without for long periods of time. While liquidity is not a problem if you only invest in venture capital ETFs, it is still important to only invest money that you can do without.
• Intransparency: Private equity is not as tightly regulated as asset classes that are traded on stock exchanges. The absence of published information can make it difficult to accurately evaluate companies and investment products.

How profitable is private equity?

Because private equity is a broad category that covers many different kinds of investments, there is no single answer that applies across the board. The possible returns are different for each individual company you invest in.

However, the past performance of private equity ETFs can serve as a reference point for the share price developments of venture capital companies. Over the past five years and 10 years, these ETFs have outperformed the global stock index MSCI World (highlighted in blue), as Table 4 shows.

Table 4: Historical performance of private equity ETFs

Source: Justetf.com. Performance in CHF accounting for dividends. Dates used for the performance comparison: November 19, 2014, November 19, 2019, November 19, 2024.

Important: Past performance is not a reliable indicator of future performance. High returns in the past are not a guarantee of future returns. Losses are possible at any time.

Conclusion: Should I invest in private equity?

Private equity can be used to diversify your investment portfolio. However, it is important that you fully understand the companies or investment products before you invest any money. Be aware that there is a high risk of losing money. Only invest money that you can afford to do without for long periods of time – or even permanently in the event of a total loss. Additionally, you should also pay attention to fees and other investments costs, as these can be substantial.

If you are an inexperienced investor, then investing in private equity is generally not advisable because it is a complicated asset class with a high risk of loss.  

Investing in a private equity ETF can be an alternative if you prefer not to invest directly in individual companies yourself. Money you invest in the ETF is reinvested into venture capital companies, which in turn reinvest the money in companies that are not listed on a stock exchange. This gives you better diversification. But even with ETFs, losses cannot be ruled out.

Note: The information provided in this article is published for educational purposes only and should not be considered investment advice. The publishers accept no liability in connection with this article.

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