Why Invest In Private Funds Even Though They Charge Higher Fees

I decided to invest in two private funds: 1) Kleiner Perkins 20 (KP20), and 2) Kleiner Perkins Select2. Kleiner Perkins is a top venture capital shop which has made more recent home run investments in Figma and Ripple. This article will explain why I invest in private funds even though they charge higher fees.

KP20 is an $800 million venture fund focused on early-stage investments in enterprise, consumer, hard tech, or fintech, and healthcare companies. Select2 is a $1 billion fund that extends its core investment strategy to focus on high inflection investments across those same five areas.

Investing in these private funds does not come cheap. The management fee is 1.5% – 2.5% (fades over time) and the funds charge 20% – 30% of profits (increases after a return hurdle has been met). If you want to make a lot of money, I highly recommend being a venture capitalist!

These fees are much higher than your favorite Vanguard ETF or index fund. The average Vanguard mutual fund expense ratio is only 0.10%. Meanwhile, the industry average mutual fund expense ratio is about 0.6%.

So why invest in these private funds even though they charge much higher fees? Let me share some of my reasons. Some are obvious, while some are not so apparent.

Why Invest In Private Funds With Higher Fees

For those of you interested in investing in venture capital, check out the Fundrise Innovation Fund. It invests in private growth companies and charges a much lower fee. In addition, it is an open-ended fund accessible to all with only a $10 minimum, unlike traditional venture capital funds that are invite-only and have $250,000+ minimums.

I've been investing in private funds for over 10 years. Here are my thoughts on why I do and why you might.

1) Diversification and potential outperformance.

The majority of investors should invest 80% – 100% of their public investment capital in low-cost index ETFs or funds. At the end of the day, it's very hard to outperform any index. When you tack on higher fees, roughly 80% of active fund managers underperform their respective indices over a 10-year period.

If you're an investing enthusiast, you are free to allocate some of your capital towards individual stocks, active funds, and private funds for potential outperformance or diversification reasons. After all, you can never outperform an index if you just buy the index. Then again, you will never underperform an index if you just buy the index either.

Personally, roughly 30% of my investments excluding real estate are not in index funds. If I'm honest, I'm mostly looking to outperform with this capital because I've had some big hits before that have helped change my life.

2) More gains are accruing to private investors.

Private funds, like venture capital funds, are investing in earlier stages of a company's life. If the fund is able to identify a promising company early, the returns could be massive. Investing in public equity is at a much later stage, even though many publicly-traded companies continue to grow.

Here's a slide from Fundrise that highlights investing in private non-traded real estate and tech stocks. Fundrise offers private real estate funds that invest mostly in new developments, multifamily housing, and single-family housing projects. The platform charges a 1% total fee, which is low compared the vast majority of other private real estate funds.

Private funds invest in private companies at earlier stages of their life cycle

Imagine developing a residential project in a location that becomes vibrant three years later due to an influx of companies. Each house costs $200,000 to build and rents out for $16,000 a year (8% gross rental yield). In three years, rents rise to $24,000 a year for a 12% gross rental yield.

Over time, the investors' gross rental yield just gets higher based on the static building cost. An amazing return for private real estate fund investors that tends to increase over time.

Finding The Early Stage Private Company

Ideally, you want to invest in a successful company in the early stage that becomes a multi-bagger. Many private companies are staying private for much longer and going public at much larger market capitalizations. Private company management doesn't particularly enjoy public scrutiny and volatility either.

For example, Microsoft went public for $777 million in 1986 (~$1.9 billion in today's dollars). Meanwhile, Uber went public in May 2019 with a market capitalization of $82 billion! Therefore, more of the gains are accruing to earlier investors. With changing times comes a change in the stage of investing.

I own Amazon stock. But at a ~$1 trillion market capitalization, it's unlikely to be a big outperformer going forward. Eventually, the law of large numbers catches up. I'd rather spread more capital out to promising earlier stage companies.

3) Dampen portfolio volatility.

The more capital you have, the more you worry about loss. As a result, you seek to dampen your portfolio's volatility with private investments. Since private funds do not have daily market value updates, unlike publicly-traded stocks, you may go under the illusion that your private fund investments are more stable.

Private funds in the venture capital and venture debt space tend to update their Net Asset Values (NAVs) quarterly. Some do so semi-annually or annually. As a result, private fund investors don't get distracted by daily moves. They can go about their business without much stress.

Hedge funds, on the other hand, tend to send out monthly performance updates. If a hedge fund is doing its job by actually hedging, then it should also help dampen portfolio volatility. However, plenty of hedge funds leverage up and take outsized risks to their detriment. We can all hedge ourselves, which is why paying a higher fee for hedge funds is harder to justify.

Below is a chart showing the average daily percentage move in the S&P 500 is usually between -1% and +1%. The public equities markets have only become more and more volatile.

Historical Stock Market Volatility Over 10 Years

4) Gain access to investments you don't have.

Anybody can invest in any public stock for no trading fees nowadays. Google, splitting 20-for-1, will also now make it even easier for retail investors to buy one share.

However, not everybody can invest in a promising private company without connections and a glowing reputation. There is a ton of liquidity out there chasing the best companies. By investing in a private fund with experienced operators, you gain access to their deal flow.

Investing in private funds is like buying access. And if you or your business have synergies with the investments, even better.

5) The opportunity to co-invest.

Sometimes, when a private fund invests in a company, the company may offer up the opportunity for the limited partners (investors in the private fund) to co-invest. Co-invest is when the limited partner directly invests additional capital in the company.

For example, hypothetically let's say the KP20 fund leads an $40 million Series A round in a hot fintech startup in San Francisco. The fintech CEO asks KP20's managing partner whether his fund has any limited partners who are in the media or who operate personal finance sites.

The managing partner reaches out to me and sends me the deck on why they invested in the fintech startup. He then tells me the company has opened up the capitalization table for me to invest an additional $50,000 – $250,000 in the company directly.

The opportunity to concentrate more of my capital in a company Kleiner already believes is attractive could end up being very profitable. Imagine if that company was Stripe? A $50,000 investment would be worth tens of millions.

Meanwhile, as a direct investor in fintech, my interests are aligned in helping their company grow with my platform.

6) More opportunities to network.

Once you invest in a private fund, you join a family of limited partners with similar goals. If you need some advice, want a warm intro, or need to get some deal done, you might have an easier time getting some help from another limited partner. Heck, there might even be a holiday party held by the venture capital firm for its limited partners.

Being a fellow limited partner acts as a screening mechanism. It's kind of like being more responsive to alumni of your school if they seek your help. Your fellow limited partners come from all sorts of backgrounds. If you want to tap into the network, you can.

Further, once you invest in one private fund, you'll have an opportunity to invest in the next one if so desired. The reason why the fund I invested in is called KP20 is because it is their 20th fund after 50 years. I'm a limited partner in the KP18 fund.

The Private Fund Market Is Small

As a stay at home dad who isn't trying to build an empire, I don't have much interest in networking to create more wealth. However, I'm always interested in promising fintech companies that could help the Financial Samurai community.

So in a way, investing in a venture fund that invests in early-stage fintech companies gives me some added insights. Further, living in San Francisco since 2001 has provided me numerous front-seat opportunities to meet and work with promising new companies.

One of my private investment funds actually rented a SF Giants box this season for the limited partners to meet, eat, drink, and be merry. Then Kleiner hosted an incredible holiday party at Menlo Circus Club where the top venture capitalists in the Bay Area all came out.

With my platform, perhaps I'll be a venture scout or source deals myself as part of investing $1 million in capital.

Venture Capital Investment Amounts By Region

Below is U.S. venture capital investment amounts by region in Q1 2023. As you can see, the San Francisco Bay Area leads the way by far. Therefore, it's easier for those who live in the San Francisco Bay Area to network and participate in more venture capital funds.

US venture capital investment by region

7) Forces you to keep on investing over several years.

After committing a certain amount of capital to a private fund, not all of it is called at once. Instead, your commitment may be called over a one to three-year period.

For example, let's say you commit $100,000 to a fund. 20% or $20,000 might be called once the fund closes followed by 10% a quarter for the next eight quarters.

A capital call schedule keeps you investing through good times and bad times. It keeps you disciplined. Whereas investing in public investments is largely up to you. After automatically contributing the maximum to your tax-advantaged accounts, you've got to then proactively decide how much to invest in your taxable investments.

Life often gets in the way. As a result, it's easy to accumulate excess cash over time. Investing in private funds forces you to invest regularly. Further, investing in private funds forces you to stay on top of your cash. If you know there's a likely capital call coming, you've got budget accordingly.

Here is a snapshot of four capital calls I've received from three private funds. Investing in private investments is a nice way to regularly invest in good times and bad times.

Steady capital calls and investing due to investing in private funds

8) Forces you to hold for the long term.

Private funds generally have five to ten-year lifecycles before your capital is returned. Therefore, you're forced to invest for this period of time. The longer the investment time horizon, the greater your chance of making more money.

If you're investing in public securities with zero cost to liquidate, it's much easier to panic sell. Public investments can be a tantalizing source of capital every time there is a downturn or some type of emergency. As a result, some people can't help but tap their investments to their long-term detriment.

Once you commit capital to a private fund, you're committed for years. When there is no other alternative, your mind often feels more at peace. It's having too many choices that often stresses people out.

Below is a snapshot of unrealized appreciation on $109,200 in capital deployed between end of 2019 through 3Q2021 for my KP18 fund. Whether the $207,921 in unrealized appreciation is real or not is hard to say, especially with a downturn in stocks in 2022.

But I like how my $140,000 capital commitment forced me to invest $109,200 during the pandemic. I may have just sat on the cash otherwise. Investing for the long term with private funds is much easier. And investing for long term is more than half the battle to building wealth. Time in the market more important than timing the market!

KP19 private fund returns

9) Increases your chances of finding a home run investment

When you invest with smart and connected people, the chances of you discovering a home run increases.

For example, on September 15, 2022, Adobe announced it would be acquiring Figma, a design company, for $20 billion. The Kleiner Perkins 17 fund led Figma's Series B round at around a $400 million valuation. In other words, after dilution, the return is between 35-40X!

I remember when my softball buddy joined Figma back in 2019 after Uber. It was such an odd move to join this random design company. But here we are, just three short years later selling for mega bucks.

Alas, the deal was blocked in December 2023. That said, Figma received a $1 billion breakup fee from Adobe and it probably still worth over $10 billion.

The Downsides Of Investing In Private Funds

Besides paying much higher fees, there's no guarantee investing in a private fund will provide positive returns, let alone outperformance. Competition is extremely competitive for private funds to invest in the best deals.

The top funds tend to get the first look at the best deals. Therefore, if you're not investing with a top-tier fund or with a well-connected fund manager, your returns might not be that great.

If I could invest in Sequoia or Benchmark funds, I would. However, I'm not a friend or family member of any of the managing partners. But you know what? I should proactively reach out to them given I have a platform that can help promote their investments.

The other downside to investing in private funds is keeping track and filing all the K-1s that go with each fund. So long as you are organized, you should be fine. But it's just one more thing to stay on top of each year. Each firm will have its own online system as well.

Finally, investing in private funds require locking up capital for often 5-10 years before seeing any type of returns. In general, investing for the long term is good for returns. However, if you don't properly manage your capital calls, you might find yourself in a liquidity crunch.

There has been an increase in unplanned capital calls during higher interest rate and slower private market environments. As a result, private fund investors need to more carefully manage their cash flow.

Private Fund Returns 2007 – 2021

Below is a great chart from Pitchbook about private fund returns since 2007. You'll have to zoom in to see the font. It includes returns from Venture Capital, Buyout, Growth-Expansion, Private Capital, Secondaries, Real Assets, Funds of Funds, Other PE, Private Debt, and Real Estate.

A 15-year horizon IRR above ~10% outperforms the S&P 500 historical return average. And of course, not all private funds are equal.

Returns for private funds from 2007 to 2021 and 15-year horizon IRR

As an individual investor, the key is to somehow gain access to the best private funds. If you can identify a talented manager and invest early in their tenure, you should be able to continue gaining access to their funds if they one day become a rockstar.

They will “take care of you” by letting you into their heavily oversubscribed fund because you believed in them from the beginning.

How To Gain Access And Invest In Private Funds (Venture Capital, Venture Debt, Private Equity)

Unfortunately, there's no easy way to invest in certain private funds. The ability to invest in private funds often has to do with who you know.

You either have to work at the fund, know someone who works at the fund, get introduced, proactively reach out and see if there are any synergies you can provide, or come from one of the companies the fund has invested in.

A lot of private funds have “anchor investors” from institutional funds, endowments, and ultra-high net worth individuals. Once the anchor investors are in, the fund managers and anchor investors invite smaller investors. It just goes down from there until the fund size targets are achieved.

The “friends and family round” is where we have opportunity if we know someone. All limited partners have the ability to invite their friends and acquaintances to invest.

Hence, your goal should be to get to know an individual who is a limited partner in various funds. Due to sensitivities, it's hard for the fund to reject warm introductions unless the fund is way oversubscribed.

Alternatively, there are private funds accessible to unaccredited and accredited investors online. The JOBS Act that was passed in 2012 has helped democratize access to private funds.

As a result, you've seen the emergence of real estate crowdfunding platforms, art investing platforms, wine investing platforms, farmland investing platforms, and more.

New Venture Capital Fund Open To All

I just wrote about how gaining access to venture capital funds like Kleiner, Sequoia, Bessemer, and so forth is hard without knowing someone. And even if you know someone, the minimum investment amount can easily be $250,000 or more.

This is why I'm pleased to introduce the Fundrise Innovation Fund. It is an open-ended venture capital fund investing in high growth private companies. The minimum investment amount is only $10 and is accessible to all.

The Innovation fund invests in the following five areas:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

Creating A Fund Of Funds

As someone who really doesn't like the stress of losing lots of money, I enjoy investing in funds. Then I like to invest in a diverse number of funds across categories such as real estate, venture capital, venture debt, bond funds, and equity index funds.

This way, it's a little harder for me to lose all my money in the next bear market. At the same time, these funds have the ability to perform as well.

I've only got about 25% of my net worth invested in public equities because I simply dislike volatility. Waking up to see my Netflix stock down 25% in one day is no fun. Nor is seeing the S&P 500 crash by 32% in a month.

The March 2020 implosion forced me to write a meaty article about how to predict a stock market bottom. Then I had to follow what I preached by uncomfortably deploying a lot of my cash. Although things have worked out, they easily could not have.

With public securities, I can't help but look at how the stock market is doing every day because it's so easy to do so on my phone or laptop. Therefore, I've decided to limit my public securities exposure to a level I'm comfortable with. So should you.

I'm at a stage where I'd much rather pay someone to think and deploy my cash for me, so I can spend more time with my family.

My Favorite Reason To Invest In Private Funds

My favorite reason to invest in private funds is that I get to forget about my capital once it is invested. It's nice knowing that savvy investors who want to make themselves a lot of money are doing their best to take care of my capital. It's like I'm offloading my stress of managing money to someone else.

Only in five to ten years will I get to truly see how well my investments have done. In the meantime, I will have spent my time doing the things that provide me the most joy. And making money from money is not one of them. It's one of the reasons why I got out of the finance world in the first place.

Investing in private funds is not for everyone. In fact, various private funds may not be available to everyone due to the need to be an accredited investor. However, if you are one, you might come to appreciate some of the benefits private funds have to offer.

Here is the investment statement of a venture capital fund I invested in in 2018. I committed $140,000 in capital and so far have funded $119,000. The ending balance as of 12/31/2022 is $364,241 for a four-year IRR of 27%. Not bad.

private fund IRR of venture capital - 2018 vintage

Real Estate Private Fund

One of the easiest private funds to invest in is with Fundrise. Fundrise manages over $3.3 billion invested in single-family and multifamily properties across the country. You can invest in one of their private funds for as little as $10. In an inflationary environment, investing in real estate to capture rising rents and property prices is the logical move.

I've personally invested $954,000 in private real estate funds since 2016. The stability, passive income, and diversification has been wonderful. When stocks are selling off, private real estate funds are an oasis. People want to own tangible assets that have utility during uncertain times.

Below is my latest real estate private fund dashboard showing I've received $624,000 in distributions since 2019. I got a $122,000 “surprise” distribution in July 2022. The distributions will continue for the next several years.

private real estate investment dashboard

Again, check out the Fundrise Innovation Fund. It is an open-ended venture capital fund investing in high growth private companies. The minimum investment amount is only $10 and is accessible to all.

What's interesting is that you can click the link and check out its portfolio of 20+ private growth companies. Then you can decide whether to invest and how much. With traditional venture capital funds, you have to first commit money and then hope the general partners invest in great companies.

Related posts:

Just Say No To Angel Investing

The Recommended Split Between Active And Passive Investing

Readers, do you invest in private funds even though the fees are higher? If so, why? Kleiner Perkins is one of the oldest venture capital firms that invested early in Google, Amazon, Netscape, and Genentech.

For more investing content, you can join 60,000+ others and subscribe to my free weekly newsletter. I worked in equities for 13 years and have been helping people achieve financial freedom sooner since 2009, when Financial Samurai began. Everything is written based off firsthand experience because money is too important to be left up to pontification.

45 thoughts on “Why Invest In Private Funds Even Though They Charge Higher Fees”

  1. Sam – thanks so much for this article.

    I also am looking for ways to enter into the private equity space. It does seem hard to find opportunities for those who might be accredited investors, but not instiutional or qualified clients.

    However – in browsing – I’ve run across two that have captured my interest.

    1/ Flowstone Partners — appears to have created a fund that focuses more on secondaries rather than primaries.

    2/ Moonfare has launched a feeder fund into their TCV XII fund for accredited investors.

    Just curious if you have any thoughts on funds such as these for accredited investors who want to get their feet wet in this space. Also – I’m curious if these types of funds end up getting so heavily burderned with management fees, performance fees, etc. given the structure of these types of vehciles.



  2. I started researching about private real estate recently and have a couple of questions: 1) does anybody know how crowdstreet makes money? I understand that they charge sponsors directly but how much per year as it is indirect fee for the investors at the end? 2) Is C-REIT more applicable to non-taxable account as it is structured just like public REIT? 3) Do they also charge sponsors for C-REIT in addition to 2% management fee? 4) Any feedback re all-in fees/cost for findrise vs crowdstreet? Thanks

  3. VC Employee

    Hi, would you be interested in investing in Stripe through an SPV? I can help! Happy to chat.

  4. Brett Hudson

    I personally use these guys to manage a little over a million for my personal accounts. They charge a 1% fee, use polen capital as the equity portfolio benchmark, have a private equity arm that we can invest in sourced deals and have over 5 billion AUM. It’s mainly geared towards high net worth individuals in the oil and gas space and they have some whales. americanapartners.com

    Good place for people to look for family office style management

  5. Thoughts on Yieldstreet’s Soapstone VC fund? Just posted today.

    I was interested ($25k minimum). But reading through the documentation they may invest in “initial coin offerings, initial farm offerings, and token generation events.” Not sure I want any part of that.

    It doesn’t seem to be their core objective, but I don’t like that aspect.

      1. Thank you! Indeed VC is new for Yiedstreet, but they won’t be doing the VC investing. Here Yieldstreet would invest as limited partner to a StepStone fund (StepStone VC Opportunities VII). Stepstone has lots of experience in the VC space.

        Following your review, I have been an investor in Yieldstreet’s Supply Chain Financing and Short Term Notes.

  6. Hey Sam,

    Great post. Big fan of the blog.. I met a VC founder while on vacation last summer who launched his first fund with another partner. Great guy. I kept in touch and he offered me access into his Fund I. Small $15-20mm size fund. Min investment amount is $250k. I’m a low cost passive index investor. Works for me over the long term. I ended up passing on investing only because my risk adverse self got the best of me. We stay in touch and he even sends me their quarterly updates. I think what sacred me the most was that the investment amount would have been >10% of my total portfolio. If the min was $100k I wouldn’t have questioned it. They plan to open another fund in the future etc. Was this a bad move given it’s hard to gain access into VC in the first place? I did like their current portfolio companies.

    I believe some other VC GP’s put $ into their first fund. One who is a partner at a well respected fund… My goal the last several months has been to diversify my portfolio into non-correlated assets (trying to reduce Vol) to hit my projected retirement mark of age 50-55 (currently 43). I hold public EQ’s/REITS/UST Bond mix with ~95% of the portfolio in IRA/401 tax deferred status. I have set up a self-directed account with a great fin-tech firm and put about 10-15 % of my portfolio into private real estate through the likes of Fundrise/Equity Multiple/Acre Trader. I plan to scale further in the future with another 10-15% in private commercial real estate. Given VC’s add more diversification that’s why I was so excited for the opportunity at first but when I sat back and realized the risks involved I froze given the size commitment. Any thoughts would be greatly appreciated. Keep up the good writing..

    1. Investing in a first fund is a bigger risk. A lot of the fund founder’s time will be spent on raising capital, setting up legal stuff, etc. That time could be better spent hunting for deals, doing research, and making investments.

      I don’t want to invest in a private fund without at least a three-year track record. The longer the better. Kleiner has a 50-year track record and the lead GP on the funds has about a 10-year track record.

  7. Great post! Some observations that came to mind.

    First, while outsized returns are possible, like any investment I suspect poor returns are possible as well? Is there a way to manage your losses? For instance say you “commit” to 100k over 5 years. You put 40k in the first two years and you get a statement at the end of year 2 saying your principal is worth 19k. You still have 60k to invest. What if you choose not to? Is there a penalty?

    Second, I wonder how hard it is to find “ten baggers” in the stock market. Sam, similar to your story, I just did alittle research at the time bitcoin gained public attraction and crossed 5k. I was led in my research to the “miners”. Got in Riot Blockchain when it was $1.5. I was able to ride it to the 50s before selling in less than two years. It changed my life in terms of return – probably allowed me to consider retirement 5 years earlier than I would have. Same with a company called ASTM (now VCEL). And I am not even mentioning the 10-year returns on the big boys like AMZN, NFLX, GOOG, BIDU, SHOP, TSLA. All the obvious ones that I mostly missed. But there are hundreds and maybe thousands of tech and biotech companies that have returned 10-20 baggers or more in even less than a year. Alot did just in 2020-2021. And no fees or penalties for early withdrawal.

    Third, what I like about the market is I can manage my losses. When Riot went from 1.5 to 20 I would set trailing stops to preserve gains. If I buy FB today, I can set a stop at say 220 and get out pretty much whole if things get worse. It sounds like if you do that with a private fund you may incur a penalty and also likely lose your seat at the table.

    Fourth, what I do like about private equity idea is it somewhat insulates you from selling winners too early. What I didn’t say above was that I started liquidating portions of my RIOT holdings at 20, 25, 30, and 40, finally selling last bit at 50. IF I would have sold all of it at 50…..piggy I know, but nevertheless.

    1. You can stop contributing, but there may be some type of financial penalty and you will be blackballed from any future funds they launch. Might not be a bad thing if they stink that bad!

      Finding multibaggers are hard. But they are out there everyday. I know with the amount of time I spend searching as a dad of two little ones, I likely won’t find one. But these funds are run by around 10 people across industries, and all they do is hunt for multibaggers.

      So I’m happy to pay them to do the work for me. It’s almost like outsourcing my gardening work, but for a higher fee and much higher potential return.

      1. Fund Marketing

        You absolutely cannot stop funding your capital calls. This is called an LP default and is generally why these investments are only offered to institutions (where there is professionally managed liquidity) rather than retail investors.

          1. Fund Marketing

            It’s a huge headache for the general partner.

            In the spirit of the question, if an LP was to simply stop meeting capital commitments they would likely be subject to substantial damages, up to all of the LP’s interest in the fund.

            If something catastrophic were to happen (like, a university burns to the ground or something and goes bankrupt), the GP would have to rebalance the fund and each LP’s exposure to the underlying portfolio. There would also have to be an approval by the fund’s advisory committee to liquidate the defaulting GP.

            Suffice it to say, if an LP ever purposefully defaulted they would never get shown another opportunity. If something else outside the LP’s control were to happen it would be a huge pain for the GP and other fund LPs, especially if the defaulting LP was a large investor in the fund.

            1. “If something catastrophic were to happen (like, a university burns to the ground or something and goes bankrupt), the GP would have to rebalance the fund and each LP’s exposure to the underlying portfolio. There would also have to be an approval by the fund’s advisory committee to liquidate the defaulting GP.”

              This is the answer. Thanks!

              Yes, it would be a big headache for the GPs and the firm. And the failing LP who doesn’t commit will be blackballed.

  8. Sam,

    Excellent post. I work in the M&A space this resonated with me since My clients are in private equity. In reality with all the automation, I really think true active mgmt is now in private markets or private real estate. Sure – you can invest in index or public markets, but to get true portfolio balance, I’m with you, I have money in FundRise and private single family investments.

    I have Not ventured into private equity directly, but looked at this website called Micro Ventures. You should do a review of them… looks like a fundrise but for PE space!

    1. Never heard of Micro Ventures. If they reach out, I may consider.

      What about just investing in publicly traded private equity companies? Could be interesting.

  9. Dunning freaking kruger

    I’m going to re-read this a few times. It is but one example of why Sam D is the Led Zeppelin of personal finance.

    Freaking good article. Kind of over my head now. But I’ll read it to myself without moving my lips to help.

    1. Dunning freaking kruger

      Double post.

      We do not invest in private funds. Yet. We are getting ready to invest in fundrise. We have done research and feel Comfortable with Fundrise. Maybe Crowdstreet.

      The exotic funds mentioned in this article are scary for a dumbass such as moi.

      1. Never invest in what you’re not comfortable investing in. Also never invest in something you don’t understand. Two good rules before putting any capital to work! I don’t see VC as exotic because I’m in this world as a private equity investor, angel investor, and online small business operator who has lived in San Francisco since 2001. Startup world is part of our culture.

        Fundrise is bread and butter private single-family, multi-family, and build-to-rent investments. If you believe in inflation, higher rents, and higher property prices like I do, investing in Fundrise makes sense.

        CrowdStreet sometimes offers funds as well. But they mostly introduce investors to vetted individual real estate opportunities in 18-hour cities. You then end up investing directly with the sponsor. So you should do more due diligence on the sponsor, even though CS already did the research for you. The longer the track record, the better.

        With Fundrise, it vertically integrated. So Fundrise sources the deals, raises capital for the deals, and manages them as well.

        1. Hi Sam! Thanks as always for your articles—and your newsletter. You helped me out earlier this year on a question regarding NYC real estate. We are now actively looking, thank you!

          I’m wondering what you think of the new CrowdStreet C-REIT that was announced today? I’m intrigued by the diversification, and the more achievable minimum. Thanks for any thoughts you might have. Hope you are getting more free time this year!

          1. I saw the announcement today as well and I am excited for it. When I met them back in 2018 and 2019, I was Pushing for them to start more funds. Since then, they have, such as a build-to-rent fund and an industrial fund.

            The minimum on the C-REIT of only $25,000 is very attractive too. One of the hardest things about investing in real estate crowdfunding is that the best deals often close very quickly. So if you aren’t on the ball, you will miss out. Therefore, investing in a phone automatically gives you the best dibs on all the best deals. That’s very valuable IMO.

            1. Thanks for the response, Sam! I’ve signed up for the webinar. Appreciate your work—thank you.

            2. Sam—listened to the webinar today on CrowdStreet’s new C-REIT. It does sound compelling for all the reasons above—but, it looks like they’ll invest quite a bit in build-to-rent and multi family, which overlaps with what we already have with Fundrise. Curious to hear your take on this, if you have a chance. (And if not, totally understand!) I’m leaning towards sitting this one out, until there’s a fund that’s more differentiated from our current investments. Thank you as always!

              1. Hi Rusty,

                I like investing in funds because:

                1) Diversification
                2) A management committee will select the best of the best deals
                3) Hands off and more peace of mind

                Unless you have a lot of time and enthusiasm, picking the best deals is time consuming. And I don’t have the time to always stay on top of a new launch. Further, sometimes, the demand is so high for a particular deal, you can’t even get in.

                I like investing 70% of my capital in private real estate funds and then choosing individual deals with the remaining 30% of capital.



                1. Hi Sam, Thanks again for this. No need to respond–just wanted to say thank you. What crazy times we are living in.

    2. Sam,
      Did you invest in the Fundrise IPO or do you prefer a strategy of investing in a fund that has multiple private deals?

  10. FrugalSpender

    Great points Sam about private funds. Would be great if you can help outline how does one get a list of private funds to research before investing. Is there a recommended “portal” or service that provides this? Or it’s up to each of us to decipher those funds.
    Any direction on above would be appreciated. Great follow up comments here as well.

    1. I’m not aware of a portal or service. I would google the top private funds in the space you’re interested in and then see if you know anybody who works there, is connected, or is a limited partner.

      You should also look at the companies these private funds invested in, and then see if you know anybody at these firms. The private funds will most certainly let the founders/employees of the companies they invest in, invest in their funds.

    1. I invested $5,000 in the Fundrise Interval Fund, a private fund that invests in private real estate. It went up 28% in 2021, and over 40% annualized.

      Private funds are becoming more accessible than ever. The minimum investment is $10.

      I am an average investor. If you don’t believe you can invest in a private fund, you are right.

      1. “ If you don’t believe you can invest in a private fund, you are right.”

        I like the spirit of this attitude. Wherever you go, there you are.

        We believe what we want to believe. And end up with a situation based on our beliefs

    2. Not true. We’re invested in several VC funds because my spouse works in the industry, and there are many lps who are “average investors with a lot of money.” If you have a lot of money and actively network in your business community or alumni association or golf club or kids’ private schools or on the board of a nonprofit, then you know most likely know someone in VC who can help you get in.

    1. You either have to work there, know someone who works there, get introduced, proactively reach out and see if there are any synergies you can provide, or come from one of the companies the funds have invested in. A lot of it is networking.

      If I developed a strong relationship with a FS reader over the years who really wanted to invest in a KP fund, I’d make the intro as well. There’s usually a friends and family round for many of these private funds.

  11. Jason Bourne

    All great points. I’ve gone all into private funds past few years (early stage venture up to diversified buyout). My allocation is probably too aggressive for most but it keeps me financially disciplined and frugal day to day. But the story of private > public markets is so obvious and painfully clear that I feel very good about my portfolio construction.

    Retail / public market investors will continue to be left holding the bag on over-hyped late stage companies post IPO, but also huge amounts of capital is accruing in the private equity secondary market, which only increases exit options for companies and GPs and their ability to stay private (sponsor to sponsor secondary transactions, continuation vehicles, etc.). Hence, I will be able to receive distributions despite the companies not having to go public.

    20-30% carry is generally egregious but top managers like KP can command it and often times deserve it as they generate 20% net of all fees/carry.

    Sam – given I’m pretty new to this, how often are the LP to LP networking opportunities as an individual investor? Obviously institutional LPs talk to each other frequently, but how do these opportunities present themselves and how can you increase networking opps? Do you just go through the GP?

    1. I work in private equity, and while I agree that 20-30% seems egregious, keep in mind that only starts paying once the investor gets all their capital back as well as their preferred return (in PE that is usually 8%-9% annually).

      1. Yes, 20% – 30% is why we should all be PE and VCs! But yes, capital back and reaching preferred return until the carry kicks in.

        The thing is, many of these top shops often feel like they should charge even more. After all, they are the ones landing these deals… so why not a 50/50 split after a pref return?

        1. Sam, I can only speak to my experience but as you probably already know 20% is the standard carried interest for PE firms with top performers able to charge 30%. I think the reason we don’t see PE firms (can’t speak for Venture) charging more is that PE is such a competitive field and there are SO many firms out there competing for the same deals that overall PE returns are less than they used to be and the difference in returns between a 2nd, 3rd, and 4th quartile firms has become compressed. The true outliers in the top quartile (or even top 10%) find it harder and harder to be the top performers in their strategies fund vintage after fund vintage. I.e., it is common to see a firm go Top Quartile, 3rd Quartile, 2nd Quartile, 1st quartile and for that reason they can’t demand higher percentage of the profits.

          1. Makes sense. I wonder how the guys at Thoma Bravo are crushing it so often, with big funds too?

            As a PE guy, please confirm you have one of the most lucrative, best jobs one could have!

            1. Yes, I can confirm that is it is a very lucrative job, and amazing fun because of the diversity of investments, the impact you can have on outcomes, and the reward you get (long term) when those outcomes are strong.

              I had a very non-traditional path to PE and got in to it very late (most folks enter at ages 25-30). I worked in traditional start-up/corporate jobs for many years before getting into PE so I appreciate it even more than those who started in it.

              and YES, those Thoma Bravo returns are nuts!

    2. This opportunity presented itself after I met the lead managing partner at my friend’s 40th birthday party 4 years ago. We then went hiking in Joshua Tree for an hour and I got to know him. As a result, I was invited to invest in his new fund when he joined KP. And I also got to learn more about him and how he thought.

      It’s really about listening, learning, and meeting new people. You just never know. So it’s good to be friendly and keep an open mind.

  12. Thanks for the insights and such a thorough post! I considered buying a small private investment in December but decided not to because I wasn’t fully convinced of the future performance potential, the fees, and also wanted to avoid getting a K-1 and having to file an extension for my taxes. I’ve invested in ETFs for so long it’s hard to break out of my comfort zone.

    I like your point on how private funds help keep you disciplined in putting your money to work through the capital calls. Without discipline it’s practically impossible to make any significant growth in one’s assets over time. The more ways we can automate our savings, contributions, and investments the better.

Leave a Comment

Your email address will not be published. Required fields are marked *