How to Invest in Private Equity Funds: A Beginner’s Guide for LPs

Private equity is entering a new era of opportunity and for beginner limited partners (LPs), which means there is ample reason to get involved.

Despite a challenging economic backdrop, investor appetite for private equity remains strong, fueled by the search for higher returns and portfolio diversification.

Data from recent years show record levels of fundraising, expanding assets under management (AUM), and a broader investor base. 

Private equity funds have globally gathered about $180 billion in Q1 2025, $22 billion less than in the equivalent period of 2024.

This slight dip highlights the impact of higher interest rates, cautious LP sentiment, and a slower exit environment, which together have moderated the flow of capital into new funds.

Yet, limited partners remain optimistic. Many plan to increase their exposure to private equity this year and that shows continued confidence in the asset class. 

For example, McKinsey's recent Global Private Markets Report 2025 reported that 30% of LPs plan to increase their private equity allocations in the next 12 months.

That’s compared to 16% who plan to decrease them, which is a net positive. So here’s what you need to know before diving into the investment world as an investor.

What is a Limited Partner (LP) in Private Equity?

If you're thinking about investing in private equity — or if you're managing clients who are — you're stepping into the role of a Limited Partner.

Private equity is structured around partnerships between these two key players:

• General Partners (GPs), who manage the investment strategy and make operational decisions.
• Limited Partners (LPs), who provide capital but have no direct involvement in the fund’s daily operations.

While GPs handle investment management decisions and strategy execution, LPs contribute capital without participating in daily operations.

LPs typically include: High-net-worth individuals (accredited investors), family offices, pension funds, sovereign wealth funds, and insurance companies.

Why Private Equity and Why Now?

In recent years, private equity firms have seen significant growth, fueled by investors chasing higher returns than what’s available in the stock market.

Unlike traditional mutual funds or ETFs, private equity gives investors access to private companies and innovative startups, offering broader exposure across different geographies and sectors like real estate and technology.

It’s a welcome alternative in a time of rising geopolitical and economic uncertainty.

Once reserved for institutions and high-net-worth individuals, the private market is now open to a wider audience through new platforms and easier onboarding.

Private equity funds in Europe raised around €118 billion in the first half of 2024 alone. Fund managers capitalized on strong investor appetite, with buyout fundraising jumping 32% year-on-year in H1 2024. 

This momentum has kept Europe ahead of the pack in many areas even as global private-market totals cooled.

For example, dealmaking surged by 35% in Europe in 2024, a far faster rebound than in other regions. Forecasts even suggest Europe’s alternatives AUM could swell to €5.5 trillion by 2029.

This all means that for limited partners, 2025 is shaping up to be a pivotal year. Surveys show that nearly 60% of LPs intend to increase exposure to PE this year.

As investors seek to diversify portfolios and achieve higher risk-adjusted returns, private equity, particularly within technology and innovation-led sectors, is seen as a great opportunity.

If you’re a veteran investor you probably already know this. But for beginners, success in today’s market will demand sophisticated, multi-pronged strategies.

Understanding the Fund Lifecycle (from an LP’s perspective)

The typical lifecycle of private equity funds includes three to four stages if you’re including extensions:

1. Commitment Phase
   LPs conduct due diligence, review offering documents, and complete onboarding, including compliance with regulatory requirements like FINRA’s BrokerCheck.
   
2. Investment Period
   LPs meet their capital obligations through periodic capital calls (a formal request by a fund's GP for a portion of the capital that LPs have committed to invest). GPs identify and acquire stakes in promising portfolio companies, potentially targeting future IPO opportunities or strategic sales to public companies.
   
3. Harvest Phase
   Investments are exited through sales, mergers, or IPOs, resulting in distributions to LPs. This phase also involves performance tracking and potential reinvestment decisions.
   
4. Extension
   If portfolio companies require additional time to mature or if market conditions are unfavorable for exits, the fund may enter what we call an Extension Phase.
   
   During this period, the GP may seek consent from the LPs to extend the fund’s life, often in one or two-year increments beyond the initial term. The fund’s governing documents will determine if this is allowed. 
   

How to Become an LP Investor: What You Need to Know First

Before committing to private equity, consider these important points:

• Minimum Investment Thresholds: LP investments typically require significant initial allocation, often exceeding thresholds common in other alternative investments.
  
• Illiquidity and Time Horizon: Private equity investments are notably illiquid, usually locking in capital for 7–10 years. See the typical fund term outline above. 
  
• Fee Structures: LPs typically pay management fees plus performance-based carried interest (after LPs have received their initial investment back along with a predetermined preferred return, GPs are entitled to a percentage of the remaining profits), influencing net returns.
  
• Tax Implications: Investors must navigate complex international and local tax regulations, which can significantly impact returns.
  
  These might include the FATCA (Foreign Account Tax Compliance Act) in the US, CRS (Common Reporting Standard) in the OECD.
  
  In Germany, investors must also comply with regulations like the Investment Tax Act (Investmentsteuergesetz), which governs the taxation of investment funds and impacts how income and capital gains are treated.
  
  Moreover, the Abgeltungsteuer(withholding tax on capital income) applies to dividends, interest, and capital gains.

Types of Private Equity Funds LPs Can Access

LPs can diversify their equity portfolio through different private equity strategies:

• Primary Funds: Invest directly into companies through strategies such as buyouts, growth equity, or venture capital.
  
• Co-Investments: LPs co-invest alongside GPs in a specific investment, offering reduced fees and targeted exposure.
  
• Secondaries: Provide LPs access to pre-existing fund stakes through the secondary market, offering improved liquidity.
  
• Evergreen Funds: These investment vehicles offer periodic liquidity compared to closed-end structures.
  

Friction Points LPs Should Know About

Onboarding Limited Partners (LPs) into an investment fund is far from straightforward. 

It involves substantial paperwork and regulatory compliance challenges, especially navigating rules from bodies like the Securities and Exchange Commission (SEC) and FINRA in the US, or the FCA, ESMA, and BaFin across Europe.

When done manually, it’s a system that practically invites friction. Errors slip through.

Fund managers spend more time herding documents than actually managing funds. Meanwhile, the clock ticks, and the costs — both financial and emotional — can quietly pile up.

Platforms like Vestlane solve pain points by simplifying and automating these processes, improving compliance and investor experience, while reducing administrative burdens for both investors and fund managers.

Choosing the Right GP or Fund Manager

Selecting the right private equity general partner (GP) or fund manager is a critical decision that can define the success of your investment portfolio.

Private equity investments often span years, with little liquidity and limited transparency. It’s important to evaluate your managers across several criterion:

• Past Performance: Although historical returns are not guarantees of future outcomes, they offer valuable insight into a manager’s investment strategy, decision-making skills, and ability to perform across different market cycles.
  
  This is especially important when teams are more distributed or less centralized, where consistency in execution can vary.
  
• Valuations: Assess how conservatively or aggressively managers value their portfolio assets.
  
  Unrealistic or overly optimistic valuations can lead to a misalignment of interests between managers and investors, particularly when carried interest (performance fees) are triggered based on interim valuations rather than realized returns.
  
• Transparency and Conflicts of Interest: A high-quality GP or fund manager should maintain clear, consistent communication with investors. It’s critical to identify how conflicts of interest — such as cross-fund investments, GP-led secondary deals, or service provider relationships — are managed.
  
  Thorough due diligence should focus on governance structures, reporting standards, and the manager's alignment with investor interests.

The Future of LP Investing: Digital, Global, Efficient

The future of LP investing is being reshaped by three dominant forces: digitization, globalization, and the relentless pursuit of efficiency. 

As traditional asset classes face headwinds — with fluctuating interest rates and persistent public market volatility — Limited Partners are seeking new ways to access returns, diversify portfolios, and manage risk.

This new environment demands more than just access. It demands the streamlining of every aspect of investing — from onboarding and compliance to fund subscription and reporting — enabling efficient participation in private equity opportunities worldwide.

LPs are no longer content with manual processes, fragmented data, and limited visibility.

Instead, they expect real-time reporting, automated capital calls and distributions, and global investment options at their fingertips.

We believe the next generation of investment management infrastructure will be built around these expectations.

Ready to Invest Smarter? Start with Vestlane

Private equity is no longer exclusive. Vestlane simplifies investor onboarding, ensuring full regulatory compliance and operational efficiency.

Simplify Complexity, Unlock Opportunity

Imagine a world where KYC/AML processes don’t slow you down, they accelerate you.

Vestlane automates investor onboarding with fully digital KYC/AML workflows, reducing manual work.

Through dynamic subscription management and secure, centralized data rooms, investors access everything they need, whenever they need it — all while ensuring full compliance with global regulations.

Compliance Built In, Not Bolted On

Compliance is in Vestlane’s DNA:

• 360° KYC/AML coverage built for audit-readiness.
• Jurisdiction-specific workflows for the most complex legal environments.
• Real-time name screening integrated with ComplyAdvantage.

Every step, from identity verification to AML risk assessments, is informed by deep legal expertise and powered by intelligent data capture. Our platform ensures you’re continuously compliant, with minimal manual intervention.

Go Global Without Barriers

Your next investors could be anywhere — and with Vestlane, you’re ready:

• Support for investors across 100+ countries.
• Compliance expertise spanning multiple jurisdictions.
• 300+ funds already trust Vestlane to streamline their global operations.

Expand into new markets. Raise internationally. Stay compliant everywhere.

Transform Onboarding into a Competitive Advantage

In private equity, timing is everything. With Vestlane:

• Repeat investors sign in just five minutes.
• First-time investors are guided through smart, intuitive forms.
• Fund managers tap into a network of 6,000+ pre-onboarded LPs already verified and ready to invest.

The result? Fund closings that used to take months now happen in days. If you like how all this sounds, contact us using the form below. Good luck on your LP journey.