Private equity is commonly how the rich got rich. Theres all sorts of asset classes not available to the common public that keep them from reaping rewards. Another being investing in catastrophe bonds and insurance. Tons of fortunes made off all sorts of financial assets, that really arent that esoteric, they are just in the shadows.

"how the rich got rich" is survivorship bias. Private equity is also how many people lost some or all of their life savings. I myself have "invested" tens of thousands of dollars in a few startups that have actually gone on to be moderately successful. But my equity has been so diluted that I will be lucky if I get back half of my original investment. The game is heavily biased towards the last shark in the pool, and I am not a shark.

Startup investing isn't private equity. Private equity is acquiring a profitable company with limited equity and a pile of debt, paying it down, and selling it at a profit.

Startup investing is a subset of private equity investing.

Pe includes many illiquid subcategories including real estate, LBOs, startup investing, even niche stuff like infrastructure investing

> Startup investing is a subset of private equity investing

Not as the term is used in finance. Venture and PE are separate asset classes. Venture-like assets can become PE-like, in the same way private equity can become public equity. But PE is based on cash flows and leverage; VC is based on growth.

Not according to the CFA Institute, or any number of other sources. LPs may incorrectly label PE and VC as separate subsets, but most large, institutional LPs will have PE, then separated by type.

CFA is the best source, but there are so many others, including my professional experience at a major asset manager.

https://www.cfainstitute.org/en/membership/professional-deve...

> Definitions of private equity differ, but in this reading we include the entire asset class of equity investments that are not quoted on stock markets. The private equity class stretches from venture capital (VC)—working with early stage companies that in many cases have no revenues but have potentially good ideas or technology—all the way through to large buyouts (leveraged buyout, or LBO) in which the private equity firm buys the entire company. In some cases, these companies might themselves be quoted on the stock market, and the private equity fund performs a public-to-private transaction thereby removing the entire company from the stock market.

No one said VC, PE most certainly does invest in startups with exactly that focus on cash flows and leverage. The ones I have experience with tend to look at "older startups" think something like a 7-year-old company that don't really have a hope of a large cash payout but is still viable as a business. It seems to be one transition path for a traditionally VC backed company to resemble a regular small business.

I have personal experience with at least two startups that had undergone that experience and are still around right now.

Or acquiring a company that has little debt and then piling debt on it to pay your acquisition costs back to the point where it goes bankrupt.

Right! Absolutely no way you can lose your shirt in the public markets, right? Tell that to Wirecard investors...

Private Equity doesnt work like that, vc investing is a completely different game. If you want to stay middle class, continue investing like the middle class, i.e. etfs. If you want to move up, invest like those in the class above you do. I think the common knowledge about what kinds of risk the common man should be taking on are in some ways constructed to keep the "prestige" of finance. Its an industry built upon the appearance of competence

By "invest like those in the class above you do" do you mean "manage the funds and siphon off a guaranteed percentage of the funds managed per year regardless of absolute or relative performance"?

Yes, but the ones who get rich from PE funds are the PE fund managers. Investors not so much: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820

Catastrophe bonds don’t offer very high yields. Usually between 2 and 5 percent above treasuries, if no catastrophes happen. They have a similar return as high yield bonds, with the advantage that the losses are generally uncorrelated with the returns of other financial assets.

Cat bond investors usually have large portfolios of other bonds, and are mostly insurance companies and pension funds who want to marginally improve their results without increasing volatility.

There are however situations where a cat bond investor can make a lot of money: live catastrophes. For example, if a hurricane is on its way to Florida, cat bonds covering Florida insurers will trade at a deep discount. If the hurricane changes its course and doesn’t make a landfall, their price goes back to par. A skilled (or lucky) investor could double their capital in a few days.

I call out cat bond investors because I used to work at a bond fund. Never seen so much money made so discreetly and often reliably. Highly leveraged reinsurance bets that often have constant payouts.

Depends on which part of the ladder you are on. If you're the fund manager of a big fund, you got rich. If you're the LP of growth seed rounds, you probably got rich. If you're the LP of later stage rounds, you probably didn't get rich.

Anything I would have made will get eaten up (and then some) by large fees.

> You don't want your retirement account to be a casino.

You should take a look at Fed actions regarding public markets over the past few months.

401k's are multi decade long investments and having some PE in the mix is not unusual.

Certainly all the big PF in the UK will have some PE - source I had an off the record briefing from a trustee on one of the biggest UK ones.

The change allows for private equity exposure through a multi-asset class managed fund. A 401(k) shouldn’t (and still can’t) invest in private equity directly and it can’t invest in a private equity fund. People won’t suddenly be betting their 401(k) on WeWork.

It’s definitely a bit riskier but no one is going to lose their retirement savings because of this rule change. The fees on the funds that offer this exposure are where 401(k) accounts will really get screwed.

"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the economy. Many people deride HFT and day traders while failing to understand that just buying the S&P index is actually more economically harmful.

For all the faults in the industry, fundamentally, private equity provides a means to invest in private companies that can benefit from loans or funding rounds, while also offering a return on investment to smart private equity investors. There have been plenty of scandals with private equity firms taking advantage of bankruptcy laws in large companies, but the industry as a whole seeds companies of every size, even though you only hear about VC firms in the tech startup bubble.

>just buying the S&P index is actually more economically harmful.

What

Buying the index just inflates the prices of all large companies held in the index without any due diligence into which ones have future potential. Not only are you failing to allocate your own capital into the economy productively, but you are counter-acting the investments of those who have made diligent investment decisions (while also providing them with alpha and a means to profit from your inefficiency).

Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of investing it doesn't accomplish much.

Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap.

The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy.

So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."

The alternative is to not invest in companies or asset classes you don't understand. Most people are capable of understanding real estate, cash, and bonds, but the latter two have become severely weakened in the post-Bretton Woods economy. This has also coincided with a huge increase in wealth inequality, and index funds haven't changed that.

Average people should be able to grow their wealth over time without throwing money into inefficient instruments.

Before the rise of index investing, mom and pop didn't invest in stocks at all. They had a defined-benefit pension and kept their savings in a portfolio of CDs and government bonds.

Yeah, I certainly can't dispute that.

I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that.

By analogy, house flippers rely on a market for turnkey homes.

People who buy IPO's, and to a lesser extent, pick stocks, help fund that, but buying the index simply rewards companies that made it into the index and makes it harder to devalue under-performers. As with any statistically large index, some of the companies in the index will be correctly boosted by your capital, while others will be incorrectly so.

My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.

Is the current public market not a casino?

I would not call public markets a casino, but I suppose some people have pretty liberal definitions for such things.

Public companies have to submit regular financial reports, which are handled by independent auditors. So you can be reasonably sure that a company claiming to make money, is making money. And executives have a legal requirement to protect share holder value.

Buying shares in Apple is much less of a "gamble" than opening your own business.

Not to the same extent as PE because of all the regulatory requirements of being a public company.