Private Equity: What it is and Why It Belongs in the Right Portfolio
SpaceX spent over two decades as a private company. During that time, it reshaped the aerospace industry, launched astronauts to the International Space Station, built the world's largest satellite internet network, and became one of the most valuable companies in the world—all before most investors had the opportunity to own a single publicly traded share.
SpaceX isn't unique. Many of today's most innovative companies create substantial value while remaining private for years. In fact, according to Capital IQ, approximately 86% of companies with more than $250 million in revenue are privately held, meaning investors focused solely on public markets are accessing only a fraction of the overall investment universe.
That's the reality of private markets. Some of the most significant value creation happens before a company ever goes public, and private equity is one of the few ways eligible investors can gain access to those opportunities.
What Is Private Equity?
At its core, private equity is investing in companies that aren't listed on a public stock exchange. Rather than purchasing shares of companies like Apple or Amazon, investors gain exposure to privately held businesses that are growing, expanding, or preparing for an eventual sale or public offering.
How Does a Private Equity Fund Work?
A private equity fund pools capital from a group of investors and deploys it into privately held companies. The fund is managed by a professional investment team that sources opportunities, invests in businesses, and works to increase their value before eventually exiting those investments.
Depending on the strategy, many diversified private equity funds invest across dozens of companies over a five- to ten-year period. Capital isn't invested all at once. Instead, investors commit an amount upfront, and the fund calls capital over time as opportunities arise. This "capital call" structure means your full investment is typically not deployed on day one.
How Does It Fit Into a Portfolio?
At Bayside, we think about portfolios through the lens of diversification. We seek investments that don't all respond the same way to changing market conditions, helping create a more resilient long-term portfolio.
Private equity offers exposure to a segment of the economy that public markets simply don't capture. Unlike publicly traded stocks, private companies are valued based on the underlying business rather than day-to-day market trading. While that doesn't eliminate risk, it means returns are generally driven more by business fundamentals than short-term market sentiment.
The opportunity set has also changed dramatically over time. The number of publicly traded U.S. companies has fallen significantly over the past several decades, while many successful businesses are choosing to remain private for longer. As a result, an increasing share of long-term value creation is occurring before companies ever reach the public markets.
At Bayside, we don't view private equity as a replacement for traditional investments. Instead, we see it as one component of a well-diversified portfolio—appropriate only after a client has established a solid foundation of liquid investments, emergency reserves, and a long-term financial plan.
What Should You Keep in Mind?
Private equity is not appropriate for every investor. It requires a longer investment horizon, higher minimum investment amounts, and comfort with illiquidity, as capital is generally committed for the life of the fund. It is also available only to accredited investors who meet certain income or net worth requirements.
Like any investment, outcomes vary, and success depends not only on the underlying companies but also on the experience and discipline of the fund manager.
For investors with the appropriate financial profile, time horizon, and liquidity, private equity can provide meaningful diversification and access to opportunities that simply aren't available in traditional public markets.
If you're wondering whether private equity belongs in your portfolio, we'd be happy to discuss how it fits into your overall financial plan.