With popular social media website Twitter announcing that it will go public via an IPO later this year, the market has been abuzz with private equity and start-up companies. And there’s good reason. For early investors, a successful start-up can be worth some big coin once it hits the big time. Meanwhile, an improving economy has created a surge in buy-out and M&A activity. All leading to massive profits for those institutional private equity players that dabble in these markets.

If you’re a pension fund or other huge accredited investor, getting into this world of private equity is actually pretty easy. But what about us retail investors? Is it possible to gain from all of this activity?  

The answer is a resounding yes. Luckily, for retail investors accessing this world of private equity and venture capital has never been easier for portfolios.

Big Gains For Investors

The pending Twitter IPO has renewed the general public’s obsession with start-up companies. That’s because these start-ups can turn early investors into millionaires overnight. According to investment consultant Cambridge Associates' two main indexes of PE returns, both private equity investors in the U.S. and those abroad have averaged nearly 13.6% in annual returns over the last 20 years. Venture capitalists- or those who just provide seed money to start-up companies- have done even better by realizing nearly 30% returns in that time. 

Straight stock investors haven’t been so luckily. During the same time period, the broad SPDR S&P 500 (NYSE:SPY) only managed to produce 8.53% in annual returns. 

There’s plenty of reasons to think that the party will continue going for some time. Innovation in the technology and healthcare space continues to grow rapidly, while private equity buy-outs continue to reach a fervor pace. A prime example, has been computer maker Dell’s (NASDAQ:DELL) recent $24.4 billion buy-out. All in all, CEO of buyout firm Apollo Global Management (NYSE:APO) Leon Black estimates that PE investors should see low- to mid-teen returns going forward. 

Given the potential for higher returns, regular retail investors do have some options for playing these markets.

Take A Look At Business Development Companies

The first place investors should look is towards business development companies (BDCs). These firms invest in or lend to small- to midsized companies and provide managerial assistance in hopes of profiting as these businesses grow. They are basically, the closest thing to a publicly traded private equity or venture capital as regular retail investors can get. Several BDCs- like Hercules Technology Growth Capital (NASDAQ:HTGC) and Ares Capital Corporation (NASDAQ:ARCC) –have been quite successful at spotting the “next big thing” in the tech world.

Secondly, due to their tax structure, BDCs are similar to real estate investment trusts (REITS) in that they are required to payout 90% of earnings as dividends back to shareholders. That results in some hefty yields- often in the 7 to 12% range.

The Market Vectors BDC Income ETF (NASDAQ:BIZD) could be one of the best ways to add the sector to a portfolio as it offers investors a broad play. The new ETF tracks 27 different BDCs and offers a hefty 7.72% dividend yield. Since inception back in February, BIZD has returned about 5%. Expenses are high at 8.33%. But much of that stems from acquired fund fees and expenses from the underlying BDCs themselves and not the fund. 

Public PE Firms

The other choice for investors could be betting on the firms that are doing the buy-outs and venture capital themselves. While it won’t provide the same level of direct participation, the fees and earnings from buy-out funds and PE deals do trickle back into these firm’s pockets. Several major players like Blackstone (NYSE:BX) and Kohlberg Kravis Roberts & Co (NYSE:KKR) are now publicly traded and offer juicy yields and capital appreciation for their shares. The PowerShares Global Listed Private Equity (NYSE:PSP) can be used as a broad global play on these firms as well as provide some exposure to BDCs. The ETF yields 10.46%. 

The Bottom Line

Recent hot IPOs like Potbelly (NASDAQ:PBPB) and Twitter has many regular investors salivating at the chance to participate in start-ups and private equity. With returns in the 13% to 30% range, who wouldn’t be? Luckily, the world of private equity can be achieved in a regular portfolio. For investors, funds like the ProShares Global Listed Private Equity ETF (NYSE: PEX) make it all too easy.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Investing Basics

    What Is Private Equity?

    This investment vehicle attracts wealthy investors to increase the value of portfolio companies.
  2. Mutual Funds & ETFs

    Learn The Lingo Of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  3. Mutual Funds & ETFs

    Private Equity A Trendsetter For Stocks

    In this article, we'll show you how private equity sets the trend for stocks everywhere.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  9. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!