Invest in Private Equity?

[Ladeedaw]

Bogleheads, looking for some perspective and advice on a potential investment opportunity. Very rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year right now (charities, DAF, other giving). I will probably think about retiring to a second career in 2-3 years.

My business partner let me know of an opportunity he is taking with a PE firm. He knows one of the four partners personally and trusts him. They are currently aiming to raise $50M. They are essentially looking at businesses that need a bit of help to get profitable (they gave one example of a firm that does AI for schools that has a contract with a large school district). They are aiming for a 3.5x return over 6-8 years. Fund managers get 2%/year, then 20% of the profits besides that. They are “accepting” 75 limited partners. Minimum investment is $250k. They estimate that 50% of the gains will be tax free, because of a provision they are using for investing in emerging companies.

I’m on the fence, but leaning no.
Reasons for not investing:
I don’t need to
I am pretty well trained now to stay the course
It would hurt to lose $250k, which doesn’t seem likely, but it’s a non-zero chance

Reasons I think about investing:
The biggest reason is that I keep reading that there is less and less money in public markets. I’ve wondered if a small amount of diversification in private markets would be beneficial.
The partners have a decent track record and seem to know what they are doing (but what do I know?)
Probably a tiny bit of FOMO: what if my partner 10x’s his investment while I sit it out

So, what would you advise me and why?

[bombcar]

If you're willing to go to the bank, get $250k out in twenties, and douse it in gasoline and light it on fire "to send a message" then go for it.

Otherwise you're gonna find out just how much of AI is hype

(Ask why the fund managers aren't going with just 20% of the profit, no "fee")

As to the buddy who does 10x, what would you do with $2.5m more today?

[valleyrock]

I'd follow some serious due diligence, not just for the idea(s) being pursued from a business perspective, but also regarding the people involved. For the latter, serious background checks, including learning of any litigation they've been involved with (by searching civil and criminal court records), past businesses, all that. For the idea(s), analagous businesses and their success rates, examine carefully current and pending contracts, etc. I'm sure others can chime in on these and other due diligence ideas.

[Ladeedaw]

I'd follow some serious due diligence, not just for the idea(s) being pursued from a business perspective, but also regarding the people involved. For the latter, serious background checks, including learning of any litigation they've been involved with (by searching civil and criminal court records), past businesses, all that. For the idea(s), analagous businesses and their success rates, examine carefully current and pending contracts, etc. I'm sure others can chime in on these and other due diligence ideas.

Thank you. That's good advice. I can do the background for the people involved. For business ideas, where would I find success rates of analogous businesses? I feel like this is good advice because it makes me put in some work that if I'm unwilling or unable to do, it probably means I shouldn't invest.

[Rocinante Rider]

If a tsm index fund such as VTI gains 10% per year going forward, this investment would have to gain 14.5% to equal it. As far as risk is concerned, what's the likelihood of losing 100% of an investment in VTI?

Maybe this is a rare and great opportunity, "but what do I know."

[bombcar]

Thank you. That's good advice. I can do the background for the people involved. For business ideas, where would I find success rates of analogous businesses? I feel like this is good advice because it makes me put in some work that if I'm unwilling or unable to do, it probably means I shouldn't invest.

It's part of the hype cycle and past success of the principals could be indicative; but also try to find out when the enterprise started - before or after the LLM craze took off?

If it was before, it might have SLIGHTLY more of a chance, because it means they identified a problem before finding the solution, not the other way around.

[snowday2022]

If you're willing to go to the bank, get $250k out in twenties, and douse it in gasoline and light it on fire "to send a message" then go for it.

Otherwise you're gonna find out just how much of AI is hype

(Ask why the fund managers aren't going with just 20% of the profit, no "fee")

As to the buddy who does 10x, what would you do with $2.5m more today?

+1. Please don’t feed the beast.

[mhadden1]

They estimate that 50% of the gains will be tax free, because of a provision they are using for investing in emerging companies.

Would due diligence reveal how to do this? That might be worth something to understand better.

[jaMichael]

May complicate taxes
Why give up control over your money
There are many, many reasons this investment could go south
Past performance is definitely no guarantee of future returns
You are not missing out; you are doing great
Public markets plus real estate are adequate diversification

[RedJunglefowl]

I think you know the answer already. Don't do it.

Also, are you happy with your real estate investments? If I invested $475k in something with substantial risk, I'm not sure I would be happy only getting 5.2% a year in profit. I'd rather invest it in your existing 80-20 asset allocation portfolio with index funds. Historically, such a portfolio has done much better and also is much more liquid.

[ClassII]

Isn't the old quote "never invest in anything that needs you as an investor" apply here?

If this investment is so rock solid, they shouldn't be asking a random schmuck like you to invest in it. I prefer to put my money in companies that have no need to court me for my investment dollars.

Besides, if this AI thing is going to really be something I'm sure it'll make all the companies in my index fund prosper even more than today. Sure, some random tech company will make someone ultra wealthy but who's to say who that will be? It would be like asking someone in 1977 what tech company would dominate the future smartphone industry. Surely you'll make a fortune on IBM and AT&T!

Private Equity is even worse in that it's a big black box, you won't even hardly know what's going on with your money and just hope for the best. Add in the AI hype wagon and it just sounds like a recipe for getting taken to the cleaners by high paid PE execs.

[LiveSimple]

You seems to have too much assets so trying private equity is fine…
However fir me if I am not involved giving money where the transperancy is questionable, is a no no


I would try my hands in a tech focused index fund such as VGT than private equity, more transperancy, accountability and way to liqudate on my terms..

[doobiedoo]

.. rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year ..

.. aiming to raise $50M. .. aiming for a 3.5x return over 6-8 years. Fund managers get 2%/year, then 20% of the profits .. 75 limited partners. Minimum investment is $250k. ..

I’m on the fence, but leaning no.
Reasons for not investing:
1. I don’t need to
2. I am pretty well trained now to stay the course
3. It would hurt to lose $250k, which doesn’t seem likely, but it’s a non-zero chance

Reasons I think about investing:
The biggest reason is .. less money in public markets. .. diversification in private markets would be beneficial.
The partners have a decent track record and seem to know what they are doing (but what do I know?)
Probably a tiny bit of FOMO: what if my partner 10x’s his investment while I sit it out

So, what would you advise me and why?

Other CONS:
4. Lack of liquidity. All private equity [PE] funds have a 6-8 year timeframe. But it could be 20 years. You have no control over it. In the meantime, you have no access to the money and no options to sell. You already have a lot of money tied up in real estate. But you can still sell real estate if you had/wanted to. You say it would hurt to lose $250k. Well, you will have "lost it" for the next 6-8 years and maybe a lot longer.

5. Complexity. At some point [after retirement], most people want to reduce their financial complexity. I did. That's hard to do with Private Equity. [It's also hard to do with all your real estate investments, but at least you have control over that.]

6. Downside protection? What if the PE fund runs into trouble and they ask for more capital? What do you do then? Throw good money after bad? Get diluted? Write off the loss?

[TomatoTomahto]

You said it all when you put quotes around “accepting.” You’re doing fine. Don’t do it.

[Valuethinker]

Bogleheads, looking for some perspective and advice on a potential investment opportunity. Very rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year right now (charities, DAF, other giving). I will probably think about retiring to a second career in 2-3 years.

My business partner let me know of an opportunity he is taking with a PE firm. He knows one of the four partners personally and trusts him. They are currently aiming to raise $50M. They are essentially looking at businesses that need a bit of help to get profitable (they gave one example of a firm that does AI for schools that has a contract with a large school district). They are aiming for a 3.5x return over 6-8 years. Fund managers get 2%/year, then 20% of the profits besides that. They are “accepting” 75 limited partners. Minimum investment is $250k. They estimate that 50% of the gains will be tax free, because of a provision they are using for investing in emerging companies.

I’m on the fence, but leaning no.
Reasons for not investing:
I don’t need to
I am pretty well trained now to stay the course
It would hurt to lose $250k, which doesn’t seem likely, but it’s a non-zero chance

Reasons I think about investing:
The biggest reason is that I keep reading that there is less and less money in public markets. I’ve wondered if a small amount of diversification in private markets would be beneficial.
The partners have a decent track record and seem to know what they are doing (but what do I know?)
Probably a tiny bit of FOMO: what if my partner 10x’s his investment while I sit it out

So, what would you advise me and why?

I do not think that this is a bad opportunity.

"aiming for" does not mean getting however. I would almost guarantee you that you won't see all the returns from the fund for 10 years (at least).

It will make your affairs, and perhaps your taxes, more complex.

They presumably don't have a track record? So that's an issue.

[Target2019]

To satisfy Private Equity lust, we inherited/invested a bit in BX Blackstone. The private equity component works out to be about 25%.

Doing much better than lottery winnings so far.

[valleyrock]

I'd follow some serious due diligence, not just for the idea(s) being pursued from a business perspective, but also regarding the people involved. For the latter, serious background checks, including learning of any litigation they've been involved with (by searching civil and criminal court records), past businesses, all that. For the idea(s), analagous businesses and their success rates, examine carefully current and pending contracts, etc. I'm sure others can chime in on these and other due diligence ideas.

Thank you. That's good advice. I can do the background for the people involved. For business ideas, where would I find success rates of analogous businesses? I feel like this is good advice because it makes me put in some work that if I'm unwilling or unable to do, it probably means I shouldn't invest.

To learn about success rates of analogous businesses, you could ask the private equity people themselves. Maybe they have a business plan that shows this. Maybe not. Maybe they'd take the question the wrong way, so phrase it diplomatically. Then report back to us.

[bombcar]

Also remember that the government assumes you’re a savvy investor at these levels, so all sorts of normal safeguards you expect with public stocks aren’t there.

[cableguy]

I wouldn't do it. "Group investing" is not so great. And the numbers you are sharing don't appear to be the major leagues of PE. There's a very good chance there's sub par performance, they ask for more capital, your investment gets chewed up with fees, you get diluted, there's fraud, etc. I made an investment like this a few years ago and regret doing it. FOMO is real...but use my experience to get past that!

[id0ntkn0wjack]

I would be very cautious about relying on feedback from strangers on the internet regarding a $250k investment.

If this is a path that you are truly interested in, find a specific advisor who has prior experience in PE and has successfully exited so that you at least have some baseline of what to expect and what to look out for.

And remember that successful Venture Capitalists (VC) have multiple investments hoping that one hits as a unicorn.

This has a "putting all of your eggs in one basket" feel.

[afan]

There have been some excellent Rational Reminder episodes on private equity. Listen to them and learn the problems.

To even consider it, you need to be diversified across deals, managers and time.
This would put your entire PE allocation in a single investment, terrible idea.
This would put your entire PE allocation with a single manager another terrible idea.
You would have no diversification over time, again a terrible idea.

The reason PE investors must be wealthy is that they should be putting their money with multiple different funds, different managers, with investments made annually for over years, at least a decade. If each had a 250k minimum, then you would have to invest, say $1M a year for 10 years. You would need to be able to lock up that $10M for a long time with no access to it. You would need to be able to lose a large share of it without jeopardizing your finances. That means that $10M should be a small share of your total assets.

This would be very different than putting 250k in a single investment.
Even then, the arguments in favor are weak and I would not do it. With less than $10M total assets, I would not give it a moment's consideration.

[Stan Dup]

“Never invest in a business you cannot understand.”
Warren Buffet

[Carguy85]

How much entertainment value would it give you? If not $250k worth then I’d probably not do it. When we sold we were duped/ “heavily encouraged” into investing $250k each back into the company (we still work for). At the time they were a few years into a supposed 5-6 year cycle and were saying 3-4x return with minimum 8% return guaranteed. This was 6 years ago. Good news is that if they go bankrupt I could recoupe the money within a year of biz as usual. I would be totally ecstatic if I simply finally got my money back this year with the 8% return. As a poster said…100% lack of liquidity and lack of transparency. I would NEVER invest in PE again!…regardless of whatever returns I may or may not get.

[Ladeedaw]

To all of you, a huge thank you!
I might do a little more due diligence, more as a mental exercise than anything. You've helped me re-focus on staying the course, and to remember to not invest in what I don't understand, that I'm doing fine and don't need to take on this risk. Several of you also posted downsides and perspectives I hadn't considered. That's why I posted: so you could knock be back into line.

[Ladeedaw]

How much entertainment value would it give you? If not $250k worth then I’d probably not do it. When we sold we were duped/ “heavily encouraged” into investing $250k each back into the company (we still work for). At the time they were a few years into a supposed 5-6 year cycle and were saying 3-4x return with minimum 8% return guaranteed. This was 6 years ago. Good news is that if they go bankrupt I could recoupe the money within a year of biz as usual. I would be totally ecstatic if I simply finally got my money back this year with the 8% return. As a poster said…100% lack of liquidity and lack of transparency. I would NEVER invest in PE again!…regardless of whatever returns I may or may not get.

I'm sorry for your bad experience, but I really appreciate you sharing. It illustrates the timeline issues, lack of liquidity, missed targets that others have pointed out as risks.

[Ladeedaw]

There have been some excellent Rational Reminder episodes on private equity. Listen to them and learn the problems.

To even consider it, you need to be diversified across deals, managers and time.
This would put your entire PE allocation in a single investment, terrible idea.
This would put your entire PE allocation with a single manager another terrible idea.
You would have no diversification over time, again a terrible idea.

The reason PE investors must be wealthy is that they should be putting their money with multiple different funds, different managers, with investments made annually for over years, at least a decade. If each had a 250k minimum, then you would have to invest, say $1M a year for 10 years. You would need to be able to lock up that $10M for a long time with no access to it. You would need to be able to lose a large share of it without jeopardizing your finances. That means that $10M should be a small share of your total assets.

This would be very different than putting 250k in a single investment.
Even then, the arguments in favor are weak and I would not do it. With less than $10M total assets, I would not give it a moment's consideration.

Thanks. So much good advice here, and I like how directly you put it.

[Ladeedaw]

I think you know the answer already. Don't do it.

Also, are you happy with your real estate investments? If I invested $475k in something with substantial risk, I'm not sure I would be happy only getting 5.2% a year in profit. I'd rather invest it in your existing 80-20 asset allocation portfolio with index funds. Historically, such a portfolio has done much better and also is much more liquid.

I bought the real estate when home prices were still very low and before I found Bogleheads. They haven't been too much of a headache, so I'm OK with them now, but your point on returns has been on my mind and I'm working on figuring out an exit strategy.

[HMSVictory]

No way. You are already crushing it. Just be content FOMO is the most dangerous word in personal finance.

PE has done an amazing job of fleecing the public pension funds with wild promises of outperformance. The only outcome has been a bonanza of fees for the PE managers - the pension funds have underperformed simple index portfolios and many are now trying to unwind the deals.

[corn18]

I had a similar situation three years ago. Good friend of mine called me up and outlined a PE investment that he was invested in. Three days later, I wired the money to the brand new LLC end didn't think anything more about it. It was 5% of my 60/40 Boglehead portfolio. Not a big risk, but real money if it went to zero.

Finally got around to looking into what the investment is. It's an early round investment directly into a biotech. They are doing some cool stuff and actually saving lives and curing blindness. I may make a boatload of money, but now it's more fun listening in on the investor meetings and hearing all the amazing stuff they are doing to help people. I love that aspect of it. No clue if/when I may get any money back and it is not liquid. Glad I did it, but if I do more in the future, it will be for altruistic reasons vs. ROI.

[TomatoTomahto]

Just today I got a very nice email from someone offering me an investment opportunity for high-worth investors (shorthand for “no guard rails required”). They are forecasting an estimated 283% R.O.I. with tax free capital gains since they are building in a qualified opportunity zone. They’re building a new movie studio and are paired with a fund that would produce a new portfolio of films; what could possibly go wrong?

I’ll give them credit; they’re very polite in their email. Me, I’ll just stick with boring investments.

[nisiprius]

...The biggest reason is that I keep reading that there is less and less money in public markets...

I "keep reading" lots of things. But there was about $25 trillion in the US stock market in 2015, and there is about $50 trillion today. So that doesn't sound right.

[RickBoglehead]

PE are the vampires on our economy, sucking the life out of good companies with their fees over time. Go private, cut costs without worry of long term impact, go public, and get a big payoff. Then, find a new PE buyer and get another payoff.

I was hired by a PE company to be acting C-Suite for a large, well-known direct to consumer company. They PE had bought the company and made a series of stupid moves, including taking the corporate forecasting model down to a single piece of paper. When times got tough, they turned off prospecting. 2 years later, they wanted to turn it back on, but were warned they had to do it slowly. They didn't, blew it up, and the banks took over and then a large investor bought it from the banks to keep it private forever (not PE).

I wouldn't give a PE firm my pet's waste, much less my money.

[Valuethinker]

...The biggest reason is that I keep reading that there is less and less money in public markets...

I "keep reading" lots of things. But there was about $25 trillion in the US stock market in 2015, and there is about $50 trillion today. So that doesn't sound right.

The usual way this is phrased is that there is more and more money in Private Asset investing, globally.

Certainly the Private Equity industry has raised record amounts in recent years.

If we add to that Private Credit funds, which may now actually be larger (despite this being a much newer asset category) then we are indeed talking trillions of dollars.

The US Stock Market capitalisation is not the net money invested. It is rather a measure of the "last funding round" (in PE terms) of every company on the stock market. I.e. the last price at which a share was bought and sold, multiplied by the total number of shares.

That's a different number than what we are talking about in the case of Private Assets. Which is the actual money raised, which can be *spent* on buying companies and stakes in companies.

The high fees, lack of liquidity and opaque nature of Private Asset investing make it difficult for retail private investors. Plus I imagine the tax filing complications are significant. One should definitely have a scepticism that if one is being invited to the party *now* that's not the best time to join.

Historically this is very counter cyclical. A recession is a good time to invest.

[Flashes1]

I lend money to PE to make acquisitions:

* I generally despise PE firms and the people who work for them. They all went to the same 15 B-schools, live in the same part of the country, and are extremely impressed with their abilities.
* Banks love them because they bring deal flow and large fees.
* Despite selling debt, I abhor how PE's MO is to use as little of their own money to make acquisitions --- better to use banks' money and leave any failed companies to them if it comes to that (although that's very rare in my experience) ---- rather if it's a bad deal for them --- they sell it at a lower price to another PE firm and stick their investors with the losses.
* PE firms will move companies HQ'd in small towns for 100 years to a bigger city at a drop of a hat. Leaves a ton of history in the dust.

[bubbadog]

I remember reading a while ago that most "good opportunities" are the ones you have to seek out yourself.

If you a presented with a "good opportunity", it's usually not.

At least for you anyway.

[Ladeedaw]

I "keep reading" lots of things. But there was about $25 trillion in the US stock market in 2015, and there is about $50 trillion today. So that doesn't sound right.

The usual way this is phrased is that there is more and more money in Private Asset investing, globally.

Certainly the Private Equity industry has raised record amounts in recent years.

If we add to that Private Credit funds, which may now actually be larger (despite this being a much newer asset category) then we are indeed talking trillions of dollars.

The US Stock Market capitalisation is not the net money invested. It is rather a measure of the "last funding round" (in PE terms) of every company on the stock market. I.e. the last price at which a share was bought and sold, multiplied by the total number of shares.

That's a different number than what we are talking about in the case of Private Assets. Which is the actual money raised, which can be *spent* on buying companies and stakes in companies.

The high fees, lack of liquidity and opaque nature of Private Asset investing make it difficult for retail private investors. Plus I imagine the tax filing complications are significant. One should definitely have a scepticism that if one is being invited to the party *now* that's not the best time to join.

Historically this is very counter cyclical. A recession is a good time to invest.

Thank you both for the take on "less money in the stock market" idea. And I'm a skeptic by nature, so the bold part is one of the red flags I felt. If little ol' me is being invited now, the ship has probably sailed.

[aristotelian]

Looking for 3-5X return is not the same as getting it. I would recommend pursuing only at your own risk and with money you can afford to lose. It sounds like you have done a good job of accumulating wealth so I question why you would need to take more risk to boost returns.

[Cincy_1988]

Bogleheads, looking for some perspective and advice on a potential investment opportunity. Very rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year right now (charities, DAF, other giving). I will probably think about retiring to a second career in 2-3 years.

Wow, these numbers look so impressive - I'm so happy for you. I realize how "little" I've: total (house+retirement) net worth of 1.6 million as I'm about to retire after 37 years of being a university structural engineering faculty! Having a PhD from one of the best universities in the world (University of California, Berkeley) didn't help my net worth!

Best wishes to you and your business plans.

[arcticpineapplecorp.]

He knows one of the four partners personally and trusts him.

oh, well that should do it for due dilligence.

I'll borrow a phrase from Mark McGrath from PWL Capital:

Are you looking for access classes instead of asset classes?

[TextualChocolate]

If you want private investment exposure, diversify. Look at Alumni Ventures. You can invest in funds in $25k or $50k chunks, and then they often have an annual offering for units in the management company.

[Ladeedaw]

Bogleheads, looking for some perspective and advice on a potential investment opportunity. Very rough financial snapshot for me: 45 years old, $3.8M in Boglehead 80/20 portfolio. Own my house and my second home outright. Own two SFH rentals outright, each valued about $475k, each net about $25k/year. Have a real estate deal that should net $200k in the next year. Own 25% of $1M commercial office building. Income is variable, but let’s say $600k. Spending about $50k/year; gift about $100k/year right now (charities, DAF, other giving). I will probably think about retiring to a second career in 2-3 years.

Wow, these numbers look so impressive - I'm so happy for you. I realize how "little" I've: total (house+retirement) net worth of 1.6 million as I'm about to retire after 37 years of being a university structural engineering faculty! Having a PhD from one of the best universities in the world (University of California, Berkeley) didn't help my net worth!

Best wishes to you and your business plans.

That's very kind of you. I know that I've been very fortunate. Congratulations to you on a long and successful career! I owe a lot to my own engineering professors, and I'm sure you've helped a lot of students. Wishing you the best in your well-earned retirement.

[Ladeedaw]

oh, well that should do it for due dilligence.

Haha, yes, that's what has become clear to me through reading the insightful responses. I've done almost zero due diligence and am not even sure exactly how to. So, yeah, a pretty big reason to not do this.

[Ladeedaw]

I had a similar situation three years ago. Good friend of mine called me up and outlined a PE investment that he was invested in. Three days later, I wired the money to the brand new LLC end didn't think anything more about it. It was 5% of my 60/40 Boglehead portfolio. Not a big risk, but real money if it went to zero.

Finally got around to looking into what the investment is. It's an early round investment directly into a biotech. They are doing some cool stuff and actually saving lives and curing blindness. I may make a boatload of money, but now it's more fun listening in on the investor meetings and hearing all the amazing stuff they are doing to help people. I love that aspect of it. No clue if/when I may get any money back and it is not liquid. Glad I did it, but if I do more in the future, it will be for altruistic reasons vs. ROI.

Thanks for sharing your experience. This was one other reason I thought about investing with this group. They talked about creating a community and being involved with cool technologies. That's great that it has worked out that way for you and that you've found value in it. reading your post helped me realize that I'm not sure I would value that part of it enough if returns weren't on target.

[afan]

I have a close friend who spent much of their career in private equity, investing in it, working for PE funds, managing the purchases and sales of businesses. The only time they invested their own money in a PE deal was when they were able to get the insider price, without the PE fees.

PE fees take a huge share of any profits from the deal. The PE partners do far better than the investors, particularly small fry investors who cannot negotiate MUCH lower fees.

[corn18]

I have a close friend who spent much of their career in private equity, investing in it, working for PE funds, managing the purchases and sales of businesses. The only time they invested their own money in a PE deal was when they were able to get the insider price, without the PE fees.

PE fees take a huge share of any profits from the deal. The PE partners do far better than the investors, particularly small fry investors who cannot negotiate MUCH lower fees.

Both of my PE direct investments have been 2.5% up front and 20% on the equity event. For the partners.

[grkmec]

They estimate that 50% of the gains will be tax free, because of a provision they are using for investing in emerging companies.

Would due diligence reveal how to do this? That might be worth something to understand better.

It’s probably Section 1202 (QSBS)

[renter]

Hard pass for me.

[Valuethinker]

I have a close friend who spent much of their career in private equity, investing in it, working for PE funds, managing the purchases and sales of businesses. The only time they invested their own money in a PE deal was when they were able to get the insider price, without the PE fees.

PE fees take a huge share of any profits from the deal. The PE partners do far better than the investors, particularly small fry investors who cannot negotiate MUCH lower fees.

All of the above is absolutely true.

Also with coinvestment rights for employees of the PE firm that manages the fund, there's usually a leverage agreement. At least before 2008 it was non-recourse.

So you commit $1m, and RBS (then the world's 3/4th largest bank by assets, before it was rescued), would lend you another $1m. The returns from the fund get paid back to them first, but you have $2m at work on your behalf.

[Carguy85]

How much entertainment value would it give you? If not $250k worth then I’d probably not do it. When we sold we were duped/ “heavily encouraged” into investing $250k each back into the company (we still work for). At the time they were a few years into a supposed 5-6 year cycle and were saying 3-4x return with minimum 8% return guaranteed. This was 6 years ago. Good news is that if they go bankrupt I could recoupe the money within a year of biz as usual. I would be totally ecstatic if I simply finally got my money back this year with the 8% return. As a poster said…100% lack of liquidity and lack of transparency. I would NEVER invest in PE again!…regardless of whatever returns I may or may not get.

I'm sorry for your bad experience, but I really appreciate you sharing. It illustrates the timeline issues, lack of liquidity, missed targets that others have pointed out as risks.

Well just got the news …reportedly yet another 2 years before a sale….yep…I’m NEVER investing in PE again!! LOL At least it’s less than 10% of my amount invested but still roughly a years earnings so not trivial…6 years ago when I invested with them I knew nothing about investing…thank you bogleheads!!

[Drafty33]

This has the feeling of investing in dot com late in 1999, just before it was evident the bubble had burst. AI is the big buzzword today. It may still be around in 20 years and it may indeed be revolutionary but like we saw with trains and airlines and the internet, picking the ultimate winners/beneficiaries of revolutionary technology is very difficult. You’re set up with the right kinds of investments you already seem to know pretty well. You have financial freedom. There’s no reason to invest in something unknown and pay these two and twenty fees.

Charlie Munger made a joke once that someone asked fund manager why he settled on 2 and 20 for his fee. His response was “because I couldn’t get 3 and 30.” It’s a game designed to benefit the managers, not the investors.

For that reason, I’m out.

But if you do invest, I’ve heard of cases where founding/initial investors can get better deals than later investors in the form of lower fees, at least see if that’s a possibility. I believe you sign up for their normal fees but then you enter into a “side letter” that discounts or rebates the fees somehow.

Don’t believe the [baloney] about scarcity either, every marketing con in history relied on scarcity to create a sense of urgency “tickets are going fast, act now.” “Only a few left!” There appear to be many psychological tricks that seem to be working on you right now, FOMO being another one. Stick to rationalism.

If anything, that friend should be paying you 2 and 20 to help him invest in real estate as it seems you’ve been successful there. Offer him that deal and see if he takes it.