What are Private Investments and why should individual investors consider them?

Private investments are stakes in assets or companies that do not trade on public exchanges. Typical categories include private equity (control or buyout funds), venture capital (early‑stage investing), private credit (direct loans to businesses), and private real estate (institutional‑style property investments). These vehicles often sit in closed‑end funds, limited partnerships, or direct co‑investment structures and can require multi‑year capital commitments.

While private investments can produce outsized returns and unique diversification benefits, they also bring special considerations: limited liquidity, complex fee structures, concentrated risk, and different tax and reporting rules than stocks and bonds. For an overview of private equity as a category, see FinHelp’s guide on Private Equity (https://finhelp.io/glossary/private-equity/) and When to Consider Private Equity in a Personal Portfolio (https://finhelp.io/glossary/when-to-consider-private-equity-in-a-personal-portfolio/).

Why private investments matter in a diversified portfolio

  1. Diversification beyond public markets: Private assets can have return drivers that don’t move in lockstep with public equities and bonds, helping smooth long‑term portfolio outcomes.
  2. Access to active value creation: Private equity and venture capital investors frequently engage with management to grow businesses operationally, not just passively trade securities.
  3. Illiquidity premium: Investors may be compensated for tying up capital with a premium over comparable public investments, historically—but that premium is neither guaranteed nor uniform across managers.

In my practice, clients attracted to private investments often seek exposure to growth sectors (tech, healthcare, logistics) or real assets that provide income and inflation protection. However, they must accept that capital will generally be locked up for 5–10 years or longer.

Common private investment structures and what they mean for investors

  • Limited Partnership (LP): The typical fund structure. Investors are limited partners; a General Partner (GP) manages the fund. LP agreements spell out capital calls, distribution waterfalls, fees, and transfer restrictions.
  • Co‑investments: Side investments made alongside a fund, often with lower fees but requiring faster decisions and larger checks.
  • Direct investments: Buying equity or debt directly in private companies or projects; highest control and highest work/funding requirement.
  • Interval funds and listed private vehicles: Some fund structures and listed products provide partial liquidity but may still trade at discounts or premiums to NAV.

Who is eligible and who should consider private investments?

Historically, access favored institutions and high‑net‑worth individuals. The SEC’s accredited investor definition remains a primary gate: an individual with a net worth over $1 million (excluding primary residence) or income exceeding $200,000 in each of the last two years ($300,000 joint) or other qualifying professional criteria (SEC guidance, 2020). Newer exemptions and crowdfunding rules—expanded after the JOBS Act of 2012—allow some offerings to non‑accredited investors, but availability and limits vary (SEC: https://www.sec.gov/investing).

Eligibility alone does not make an investment appropriate. Individual investors should assess:

  • Time horizon and liquidity needs
  • Concentration risk and household net worth
  • Tax situation (K‑1s, carried interest, unrelated business taxable income for some structures)
  • Level of operational and manager due diligence they can perform

For tactical allocation guidance and liquidity management, see FinHelp’s Incorporating Private Investments into a Public‑Market Portfolio (https://finhelp.io/glossary/incorporating-private-investments-into-a-public-market-portfolio/) and Illiquid Asset Allocation: When to Include Private Investments (https://finhelp.io/glossary/illiquid-asset-allocation-when-to-include-private-investments/).

Practical due diligence checklist (step‑by‑step)

  1. Manager track record and team stability: Examine vintage returns, realized exits, and evidence of repeatable value creation.
  2. Alignment of interests: Fee structure (management fees, carried interest), GP coinvestment, and hurdle rates.
  3. Legal docs and governance: Read the private placement memorandum (PPM), LP agreement, subscription documents, and distribution waterfalls.
  4. Liquidity and redemption mechanics: Understand capital call cadence, distribution timing, and secondary market options.
  5. Fees and expense caps: Ask for a clear fee schedule and examples of net returns after fees.
  6. Tax reporting and implications: Confirm whether you’ll receive K‑1s, 1099s, and potential tax issues like UBTI in tax‑deferred accounts.
  7. Stress scenarios: Request downside cases and sensitivity analyses from the manager.

In my advisory work I require managers to provide at least three realized case studies and a clear example of net‑of‑fees performance for the vintage funds they raise.

Typical costs and tax considerations

  • Fees: Private funds commonly use a “2 and 20” model (2% management fee and 20% carried interest), though fees have compressed for some institutional deals. Fee negotiation matters—especially for repeat LPs or large commitments.
  • Taxes: Carried interest treatment and long‑term capital gain timing depend on holding periods and policy. Many private equity profits are eligible for capital gains treatment, but tax law can change—consult a tax professional. K‑1s are common and may arrive later in the filing season; they can complicate individual tax returns.

Reference: FINRA explains private placements and investor considerations (https://www.finra.org/investors) and the SEC provides investor education on private offerings (https://www.sec.gov/investing).

Liquidity solutions and secondary markets

Secondary markets for private fund interests allow LPs to sell positions before fund wind‑up, but trades often occur at discounts to net asset value and require buyer acceptance. Some managers offer tender programs or provide interval/continuous liquidity funds. Expect limited options and added cost.

How much of a portfolio should private investments be?

There’s no one‑size‑fits‑all answer. Financial planners commonly suggest modest allocations for individual investors who can tolerate illiquidity—often 5–15% of investable assets for qualified investors—while ensuring emergency savings, retirement accounts, and liquid allocations remain intact. More aggressive allocations suit investors with higher net worth, diversified income sources, and a long-term horizon.

See FinHelp’s guidance on Integrating Private Markets into a Liquid Portfolio (https://finhelp.io/glossary/integrating-private-markets-into-a-liquid-portfolio/) and Practical Rules for Adding Private Investments to a Portfolio (https://finhelp.io/glossary/practical-rules-for-adding-private-investments-to-a-portfolio/).

Common mistakes I see (so clients can avoid them)

  • Overconcentration in a single manager or sector.
  • Underestimating the timing and size of capital calls, which can strain cash management.
  • Failing to read the LP agreement and relying solely on marketing materials.
  • Ignoring tax complexity—K‑1s, partnership audits, and state tax filings can surprise investors.

Quick decision checklist before you sign

  • Can you lock up the capital for multiple years without needing it for living expenses?
  • Have you compared net‑of‑fees returns to public alternatives and stress‑tested downside scenarios?
  • Does the manager have a verifiable, repeatable track record and meaningful GP skin in the game?
  • Have you talked to your tax advisor about K‑1 timing and potential tax consequences?

FAQs (concise answers)

  • Are private investments safer than public stocks? No—their risks differ. Illiquidity, less transparency, and manager concentration often increase downside risk despite potential higher returns.
  • Can non‑accredited investors access private deals? Yes, some crowdfunding and Regulation A offerings allow access, but options and limits differ; check SEC guidance (https://www.sec.gov/investing).
  • How do I exit if I need cash? Secondary sales, manager buybacks, or distributions at liquidation are typical—but none guarantee quick access.

Final professional advice and next steps

Private investments can play a role in long‑term wealth strategies for eligible, well‑informed investors. My practical advice: start small, prioritize manager quality, maintain sufficient liquid reserves, and demand transparent fee and reporting practices. If you’re considering private allocations, run a formal due diligence checklist, speak with a fiduciary financial advisor, and consult a tax professional.

Professional disclaimer: This article is educational and not individualized investment advice. Consult a qualified financial advisor and tax professional before making investment decisions. Sources include the U.S. Securities and Exchange Commission (SEC) investor resources (https://www.sec.gov/investing) and FINRA investor guidance (https://www.finra.org/investors). Additional information on private equity and structuring can be found on FinHelp’s related pages linked above.