How to Invest in Private Equity: Accredited Investor Rules and Fees

To invest in private equity, you generally need to qualify as an accredited investor under SEC rules, choose a fund structure that fits the capital you can commit, pass the fund’s verification process, sign a subscription agreement, and then fund your commitment over several years as the manager calls capital. Knowing how to invest in private equity is largely a matter of understanding those gates in order, because each one determines what’s available to you at the next step.

Confirm You Qualify as an Accredited Investor

Federal securities law limits private equity offerings to investors who clear specific wealth or income bars. Under Rule 501 of Regulation D, you qualify as an accredited investor if you meet any one of the following:

Income above $200,000 individually, or $300,000 jointly with a spouse or spousal equivalent, in each of the last two years, with a reasonable expectation of the same this year.
Net worth above $1 million, alone or with a spouse or spousal equivalent, excluding your primary residence.
A Series 7, Series 65, or Series 82 securities license in good standing.¹

Entities can qualify too. A corporation, LLC, partnership, or trust with more than $5 million in assets meets the test, as does any entity whose equity owners are all individually accredited.¹

The Higher Bar: Qualified Purchaser

Many larger funds go beyond the accredited standard and require you to be a qualified purchaser. Under the Investment Company Act of 1940, an individual or family-owned company needs at least $5 million in investments to qualify. Institutional managers investing for others need $25 million in investments owned and managed on a discretionary basis.² Funds admitting only qualified purchasers operate under a broader SEC exemption and face fewer regulatory constraints on strategy. If you clear the accredited bar but not the qualified purchaser threshold, a large slice of the private equity universe is closed to you.

If you don’t meet the accredited investor standard at all, direct fund investing isn’t an option. Business Development Companies and private equity ETFs, which trade in ordinary brokerage accounts, are the routes available through public markets. BDCs must hold at least 70% of their assets in qualifying private investments,³ but they don’t deliver the same return profile as a direct commitment; you’re trading raw performance for the ability to sell any business day.

Pick a Fund Structure That Matches Your Capital

Direct Limited Partnership

The most common structure is a limited partnership. You contribute capital as a limited partner (LP) while a general partner (GP) makes all investment decisions. A Limited Partnership Agreement governs the relationship, setting out profit splits, fees, and distribution timing. Minimum commitments for direct funds frequently start around $1 million, and diversifying across several funds takes substantially more.⁴

Fund of Funds

A fund of funds pools investor capital and spreads it across multiple private equity funds. You get diversification across managers, industries, and vintages without underwriting each fund yourself. The cost is a second fee layer on top of the underlying funds’ fees. Minimums are lower, sometimes $50,000 to $100,000, which makes this the most accessible entry point for accredited investors without millions to deploy.

Understand How You’ll Find and Be Admitted

Private equity funds raise capital under one of two Regulation D exemptions, and which one your fund uses shapes the paperwork you’ll face.

Under Rule 506(b), the fund cannot advertise publicly. You find these offerings through personal networks, financial advisors, or prior relationships with the manager. The fund only needs a reasonable belief that you’re accredited and doesn’t independently verify. These deals can also admit up to 35 non-accredited but financially sophisticated investors per 90-day period.⁵

Under Rule 506(c), the fund can advertise openly, on websites and social media included. In exchange, every investor must be accredited, and the fund must take reasonable steps to verify it. That typically means reviewing your tax returns, bank statements, or a third-party letter from a CPA or attorney.⁶ If you were solicited through advertising or an online channel, expect a thorough vetting.

Verifying Your Status

For 506(c) offerings, the SEC recognizes several verification paths:

Copies of IRS forms reporting your income (W-2s, 1099s, or Form 1040) for the two most recent years, plus a written statement of your expectation for this year.
Bank statements, brokerage reports, or similar documents dated within the prior three months, combined with a credit report showing liabilities.
A written letter from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA confirming they’ve reviewed your finances and determined you qualify.
A written representation that your status hasn’t changed, valid for up to five years, if the fund previously verified you.⁶

The third-party letter route is the most popular with individual investors because it avoids sending tax returns directly to a fund manager. Fees commonly run $250 to $500, though some professionals include the letter at no extra cost for existing clients. For 506(b) offerings, you’ll still make written representations about your income and net worth in the subscription agreement, but you won’t need to produce underlying documents upfront.

Know What You’re Paying: Fees and the Waterfall

Private equity fees are often summarized as “2 and 20”: roughly a 2% annual management fee on committed capital, plus about 20% of profits above a specified return threshold. That threshold, the hurdle rate or preferred return, is typically around 8%. Until your cumulative distributions cover your contributed capital plus the preferred return, the GP collects no carried interest.

How profits flow back depends on the fund’s distribution waterfall. In an American waterfall, the GP can earn carried interest deal by deal, meaning a strong early exit pays the GP even if the fund hasn’t yet returned all investor capital. In a European waterfall, every dollar of contributed capital and preferred return goes to investors first, across the whole fund, before the GP earns anything. The European model favors investors. Check which structure applies before signing the Limited Partnership Agreement.

Fund of funds investors carry stacked fees. Each underlying fund charges its own 2 and 20, and the fund of funds adds another management fee (often 0.5% to 1%) and sometimes its own carried interest. Over a ten-year fund life, that layering meaningfully erodes net returns.

Do Real Due Diligence Before You Commit

The fund will send you a Private Placement Memorandum describing strategy, risks, and the management team’s track record. Read it, but treat it as a marketing document in legal clothing. The real work is evaluating the GP’s prior funds: what net returns they actually delivered after fees, how they performed in downturns, and how long they took to return capital.

Focus on:

Net internal rate of return (IRR) and multiple on invested capital (MOIC) across prior fund vintages, not just the headline numbers the GP highlights.
Team stability. If the partners behind the track record have left, the new team’s results are unproven regardless of firm brand.
Fund terms compared with industry norms: management fee, carried interest percentage, hurdle rate, and waterfall type. Small differences compound over a fund’s life.
Concentration risk: how many portfolio companies the fund targets and how much of your commitment could land in a single deal.

Operational due diligence, the review of back-office infrastructure, compliance, and valuation, is something institutional investors spend weeks on. Individual investors rarely have the same bandwidth, but at minimum, ask whether the fund uses an independent administrator and auditor. A GP who self-administers and self-values the portfolio is a red flag.

Sign the Subscription Agreement and Wire Funds

Once you’ve decided to proceed, you’ll complete a subscription agreement. This contract commits you to the fund and requires your Social Security number or employer identification number for tax reporting, your chosen tax classification (individual, trust, LLC, IRA, and so on), bank account details for distributions, and the dollar amount you’re committing.

Many funds now accept subscriptions through secure digital portals with electronic signatures and encrypted uploads. Some still require physical documents sent to a third-party fund administrator. Either way, the administrator reviews your materials and runs background checks. When the GP countersigns and returns a copy, you’re officially a limited partner.

Shortly after acceptance, you’ll receive wiring instructions. Most funds use Fedwire.⁷ One safety rule matters more than any other: never wire money based on instructions received by email alone. Fraud schemes routinely involve intercepted emails with altered wiring details. Always confirm the instructions by calling a known phone number for the fund administrator.

Plan for Capital Calls, Not a Single Wire

You don’t fund the full commitment upfront. Your subscription agreement states a total, say $500,000, and the fund draws it down in stages over several years through capital calls. Each notice specifies the amount and a deadline, usually 10 to 15 business days out.

That structure means you need accessible liquidity well beyond your first wire. Commit $500,000, and if the fund calls 20% in year one, you need $100,000 ready to move on short notice. The remaining $400,000 might be called over the next three to five years in unpredictable increments.

Missing a capital call triggers default provisions in the Limited Partnership Agreement, and the penalties are severe. Consequences commonly include interest on the unpaid amount, suspension of your voting rights, forced sale of your fund interest at a steep discount, or outright forfeiture of the stake you’ve already built. Your obligation to fund future calls is legally binding, and a personal liquidity crunch at the wrong moment can cost you everything already invested.

Expect Complex Taxes and Late Paperwork

As a limited partner, you don’t receive a 1099. The fund issues a Schedule K-1 reporting your share of income, deductions, and credits.⁸ Partnerships must file by March 15 for calendar-year funds, and many extend.⁹ Your K-1 may not arrive until September, so plan to file a personal extension. If you hold interests in multiple funds, each generates its own K-1, and your accountant’s time increases with each one.

Most of the profits flowing through a private equity fund are taxed as long-term capital gains if the fund held the underlying investment for more than three years. This holding period, set by IRC Section 1061, is longer than the standard one-year threshold. Gains from assets held three years or less are taxed as ordinary income at rates up to 40.8% (including the net investment income tax), while qualifying long-term gains face a top federal rate of 23.8%.

UBTI in Retirement Accounts

Holding a private equity interest inside an IRA doesn’t automatically shield the income from tax. When a retirement account holds a partnership interest, income from the fund’s business activities can generate unrelated business taxable income (UBTI). If your total UBTI across the account reaches $1,000 or more, the account must file Form 990-T and pay tax on the excess, funded from cash inside the account.¹⁰ The code allows a $1,000 specific deduction, so only amounts above that are taxable. This doesn’t disqualify your IRA from investing, but it does put a hole in the tax-free wrapper. If you’re considering this route, ask the manager whether the fund’s strategy is likely to generate meaningful UBTI.

Understand That Exit Is Slow

Private equity fund interests are typically locked up for five to ten years. The Limited Partnership Agreement will state the expected term, often with GP options to extend by a year or two. You can’t redeem your interest the way you’d sell a mutual fund. Your capital stays committed until the fund liquidates its portfolio through sales, mergers, or IPOs.

If you need liquidity sooner, the secondary market is the main option. In a secondary transaction, you sell your existing fund interest to another investor who takes over your remaining position and your obligation to meet future calls. Transactions fall into two categories:

LP-led secondaries, where you initiate the sale, typically through a broker or secondary market intermediary.
GP-led secondaries, where the fund manager restructures the fund and offers existing LPs the choice to cash out or roll into a new vehicle.

Expect to sell at a discount to the fund’s reported net asset value, especially early in the fund’s life before performance is established. The secondary market has grown, but it’s still far less liquid than public markets, and finding a buyer at an acceptable price can take months. Planning around the full lock-up, rather than counting on a secondary sale as a backstop, is the realistic approach.

1
U.S. Securities and Exchange Commission. Accredited Investors
2
Cornell Law Institute. 15 USC 80a-2(a)(51) – Qualified Purchaser
3
Office of the Law Revision Counsel. 15 USC 80a-54 – Acquisition of Assets by Business Development Companies
4
eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
5
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales
6
U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D
7
Federal Reserve Financial Services. Fedwire Funds Service
8
Internal Revenue Service. About Form 1065 – US Return of Partnership Income
9
Internal Revenue Service. Instructions for Form 1065
10
Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income