Private equity firms burst into public notice in the 1980s, as portrayed in the classic book on KKR’s takeover of RJR Nabisco, Barbarians at the Gate. Investing with the barbarians can be very lucrative, but is financially possible only for the megabucks crowd—institutions like pension programs and very rich individuals. That type of well-heeled investor becomes what’s known as a limited partner in one or more of a private equity (PE) firm’s funds (each fund has a collection of companies in its portfolio). Plus, a limited partner must be an “accredited investor,” meaning having a net worth of at least $1 million and annual income of $200,000 or more.
For the limited partners, private equity sports a pretty strong track record: It often generates superior returns compared with the overall stock market, and in tough times, PE typically loses less. According to consulting firm Cambridge Associates, over five years ended in 2022, the funds earned an annual 18.6% versus 5.5% for the MSCI global stock index. In the snakebitten year of 2022, they lost just 4.3% as the MSCI index dropped 17.2%.
