Private equity is ownership in a privately held company rather than a share traded on a public stock exchange. Investors may fund start-ups or established private businesses in exchange for equity, often seeking a significant stake and future value growth. section 1.6 section 12.0
Common ways to participate include:
- Invest directly in an early-stage company, often at the pre-seed or seed stage. section 1.2.8
- Join an angel or venture capital fund as a limited partner. section 1.2.8
- Track ownership through a cap table that records owners and their shares. section 12.2
The opportunity comes with substantial uncertainty. A successful company may produce a much larger percentage increase than a large public company, but a failed start-up can eliminate the investment. Valuation and eventual return may remain unclear for a long time, and private holdings are illiquid because they cannot usually be sold whenever desired at a predictable price. section 12.2
A high-risk allocation decision
An investor comparing a start-up with a blue-chip stock or diversified ETF must weigh the possibility of finding an exceptional company against the possibility of losing the entire investment. The comparison also includes liquidity, information availability, expected growth, and tolerance for risk. section 12.2
