4 Reasons to Avoid Investing in Private Equity

Here are the four reasons I would never invest in private equity. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free to help you make informed investment decisions.

1. High Fees

Most private equity funds operate under what’s known as the two and 20 fee structure. They charge 2% of your assets under management, and the general partner takes 20% of whatever profits they generate. You all know how I feel about a 1% assets under management fee—this is even more unreasonable.

2. Underwhelming Performance

The majority of private equity funds do not outperform public markets. The few that do are typically managed by the top portfolio managers in the world. Unless you have a $20 million initial investment, good luck gaining access to those exclusive funds.

3. Long Lockup Periods

When you invest in private equity, your money is usually locked up for seven to 10 years. This can be great for retirement accounts or endowments, but for a standard retail investor, unless you're okay with not needing that money for the next decade, you'd be better off trading the illusion of future payoffs for the reality of greater access and liquidity.

4. Loss of Control

Once you're in a private equity fund, you give up any insight into what's happening with your investment. In contrast, public markets allow you to choose how much to diversify across various sectors, asset classes, and geographical regions.

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