Mutual funds can invest in private equity indirectly by buying shares of publicly listed private equity companies, such as Carlyle Group, Blackstone Group and KKR & Co. These mutual funds are typically referred to as funds of funds. Mutual funds typically do not invest in private equity directly due to restrictions imposed by the Securities and Exchange Commission (SEC) on mutual funds.

Fund of Funds

Investing in private companies can offer higher returns, but it also exposes investors to running greater risks of not being able to dispose of their investments during unfavorable market conditions. This problem is commonly referred to as illiquidity. To avoid this issue, mutual funds buy other investment holdings companies that specialize in investing into private debt and equity securities and managing their private investments.

For example, Red Rocks Listed Private Equity Fund specializes on investing in highly reputable private equity companies, such as HarbourVest Global Private Equity, the Blackstone Group, Aurelius, Eurazeo and the Carlyle Group. Because the Red Rocks Listed Private Equity Fund does not invest directly into private equity, it adds another layer of management and fees that investors have to pay.

Illiquidity Restrictions

Mutual funds have restrictions in terms of buying private equity directly due to the SEC's rules regarding illiquid securities holdings. The SEC guidelines for mutual funds allow up to 15% allocation to illiquid securities. Also, mutual funds have typically their own rules that restrict investment in illiquid equity and debt securities. For this reason, mutual funds that invest in private equity are typically the fund of funds type.

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