This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here for the full discussion.
A listener recently asked: “We want to start investing in private equity to limit the amount of upfront capital needed. We’re planning to buy into a deal with our friends. How can we protect ourselves?”
It’s a good question, but also one that raises a few red flags. This scenario combines two elements that are rarely simple: complex investments and close personal relationships.
Why This Deserves Caution
One of the first issues in this question is the desire to limit the upfront capital required. If meeting the minimum investment threshold is already a challenge, then it may not be the right time to enter a private equity deal. Most deals start around $50,000 to $100,000, and if that’s hard to reach on your own, it’s usually better to wait and build up liquidity first. More importantly, splitting an investment with friends introduces significant legal, financial, and interpersonal complexity. If the investment is only a small part of your total portfolio, adding this level of complication often isn’t worth it. Complexity should be reserved for parts of your financial life that are meaningful in size and impact.
What Happens When Friends Invest Together
Investing with friends might sound efficient or even fun, but it rarely works out as smoothly as people expect. If you decide to move forward, your first step should be to contact an attorney.
You’ll likely need to set up an entity—typically an LLC—that pools your group’s capital. This separates your personal assets from the investment and gives the fund one legal party to interact with. For example, if four friends each contribute $50,000, the LLC becomes a single $200,000 investor in the private equity deal. However, this setup brings new questions. What happens if the fund makes a capital call and requests additional money? Each of you would need to agree to contribute more cash, say, another $25,000 each, or face potential dilution. Without clear legal agreements, that can quickly become a source of tension or conflict. And once you involve attorneys, CPAs, and financial advisors, the costs add up. For an investment of $50,000 per person, you may end up spending thousands in setup and advisory fees before you even commit to the deal.
A Possible Alternative
Some people try to avoid the shared entity route by asking the private equity fund if multiple individuals can come in separately. In that case, each friend becomes a direct investor and the paperwork is handled by the fund. However, this also increases the fund’s administrative burden, which may not be appealing to them. More investors mean more K-1s, more communication, and more complexity for the sponsor.
Final Thoughts
Private equity can play a useful role in a diversified portfolio. But when capital is limited, and the investment makes up only a small portion of your net worth, the extra layers of cost and complexity are often not justified.
If you’re thinking about pooling money with friends to access private equity, take a step back and ask yourself two key questions:
Is the investment large enough to warrant all the overhead? And if not, why not wait until it is?
For a deeper dive into this topic, listen to the full podcast episode here.