It’s popular to allocate 10% of a securities portfolio to alternative investments, such as private equity. But how do you actually do that?

Private equity investments are typically not directly accessible through the stock market because private equity involves investing in private companies that are not publicly traded. Private equity firms raise funds from institutional investors and high-net-worth individuals to invest in private companies, and these investments are usually held for several years before the companies go public or are sold.

The lack of liquidity and the longer investment horizon are factors that differentiate PE from more traditional stock market investments. However, there are two indirect ways to gain exposure to the private equity sector through the stock market:

1. Invest in Publicly Traded Private Equity Firms: Some private equity firms are publicly traded. Investing in shares of these firms can provide exposure to the private equity sector. Examples of publicly traded private equity firms include The Blackstone Group (BX), KKR & Co. Inc. (KKR), and Apollo Global Management (APO). Other tickers worth checking out: CG, BCSF, CVC, EQT, PGHN, HVPE, ASIA and APAX.

2. Exchange-Traded Funds (ETFs) and Mutual Funds: There are ETFs and mutual funds that focus on private equity investments. These funds invest in a portfolio of private equity companies, providing investors with diversified exposure to the sector. However, keep in mind that these funds may also invest in other asset classes. The most popular ones, PSP and PEX, have performed poorly and it makes one wonder how much value is lost to intermediaries.

You could also invest in listed private equity funds (usually closed-end funds) or invest in secondary market transactions (buy from an existing investor that want to get rid of his/her stake).

The idea of using the stock market for a PE investment is to maintain liquidity in your portfolio. Liquidity is the key – also for the listed PE company.

Note that the reason why a PE company goes public is to raise more money. The bigger the company, the bigger deals they have access to. The size of the company correlates naturally with the stock liquidity. This is why it makes sense to look at tickers such as BX, KKR and APO.

As interest rates are no longer close to zero, the cost of capital is higher. Private companies (think start-ups) struggle to get financing and this tones down their self-evaluation.  It’s a perfect time for larger listed PE companies to come and swoop up bargains.