For high-net-worth individuals and institutional investors, private equity is an attractive investment option because of its potential for high returns. Private equity falls under the category of alternative asset class, and although its definition is muddled, it most commonly refers to a managed pool of raised or borrowed funds explicitly used for obtaining an equity ownership position in smaller companies with growth potential. Private equity firms encourage investment from wealthy sources by boasting greater return on investment than other alternative asset classes or more conventional investment options.

Cambridge Associates, the index that tracks the performance of private equity firms within the United States, provided investors an annualized return of 16% from 2003 through 2013. Over the same time frame, the Russell 2000 Index, a performance tracking metric for small companies, returned an annualized 9.1% to investors, while the S&P 500 returned 7.4%. It is clear that an investor taking a risk with private equity investment would have received a much higher return than those who chose the more conventional route of investing in an ETF that tracked a popular index.

When compared to other alternative investments, however, private equity returns are less impressive. Through the third quarter of 2013, Cambridge Associates reported similar performance for private equity and venture capital investments over the last decade, with private equity inching ahead in most periods. However, the venture capital index returned an annualized 26.1% over the last 15 years, while private equity returned an annualized 12%. Over the last 20 years, venture capital comes out ahead with a 30% annualized return compared to private equity at 13.5%.

Although private equity can be a lucrative investment option for high-net-worth individuals, it is not the only alternative asset class that provides attractive returns. Investors interested in private equity, venture capital or other alternatives should be aware the potential for high returns also comes with a high degree of risk; it is recommended they assess their tolerance for risk prior to investing.

  1. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
  2. How Is Equity and Shareholders' Equity Different?

    A company's equity typically refers to the ownership of a public company. Shareholders' equity is the difference between ... Read Answer >>
Related Articles
  1. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  2. Retirement

    Coming Soon: Private Equity In 401(k) Plans

    The day will soon come when private equity is commonly found among 401(k) plan investment options. Here's who's leading the charge and what to watch for.
  3. Financial Advisor

    Use Private Equity Strategy to Invest

    Forget trying to be a great trader. Learn to invest like private equity firms for superior results.
  4. Investing

    Should Your Retirement Portfolio Include Alternative Investments?

    Alternative investments have the potential to generate attractive returns with the added benefit of protecting a portfolio from market volatility.
  5. Investing

    Alternative Investments: How The Game Has Changed for Retail Investors

    Learn how retail investors are using liquid alternative investments to diversify their portfolios. These funds are not correlated with stocks and bonds.
  6. Investing

    Investing in Hedge Funds Vs. Private Equity in 2016

    Discover how hedge funds and private equity face challenging market environments in 2016 and learn about funds that performed well in 2015.
  7. Investing

    Investment Strategy Case Study: Traditional Vs. Alternatives for 2016

    Learn more about some types of alternative investments and why you should consider adding them in your portfolio in 2016.
  8. Investing

    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.
  9. Investing

    Private Equity For Retail Investors

    Recent hot IPOs 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 ...
  10. Investing

    Private Equity Deals Leading M&A Wave in Japan

    Sumo Wrestlers: Private equity firms are now heavyweight dealmakers in Japan
  1. Equity

    Equity is the value of an asset less the value of all liabilities ...
  2. Alternative Investment

    An alternative investment is an atypical asset not traditionally ...
  3. Privately Owned

    Privately owned refers to businesses that have not offered public ...
  4. Return

    A return, in finance, is the profit or loss derived from investing ...
  5. Private Banking

    Private banking includes personalized financial and banking services ...
  6. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
Trading Center