Private equity is investing in a company that does not issue public stock. Investors contribute capital to a company and then receive returns on their initial investment once the company reaches a certain stage, often an initial public offering of stock or a merger [source: Wells Fargo]. Private equity investment has often funded start-up companies in high tech fields like telecommunications, biotechnology and recently, alternative energy [source: Lambert]. The success or failure of an investment depends on how well a start-up company does, which is obviously a risky proposition even in a good economic environment. For this reason, high-net-worth individuals and venture capital firms have usually been far more active in private equity than small investors. Often, the investors have a hands-on role in shaping the management strategy of the growing company.
Individual investors have a few options for investing in private equity, but one relatively safe option is to work with a private equity firm to join a pool of investors. However it's extremely expensive: Many firms require a buy-in of $250,000 to $25 million [source: Lambert]. The safest option is to purchase shares in exchange-traded funds, which purchase interests in many private equity ventures at once to decrease investment risk [source: Lambert]. There are good reasons to put a portion of an investment portfolio in private equity. Although returns suffer like most areas during economic recession, indexes of private equity funds have fared better than the stock market both during the first half of 2010 and during the 20 years prior [source: Cambridge Associates].