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A Private Affair

The private equity club is now accepting members--and you don't have to make millions to join.

With four businesses under his belt, two of which he sold for megamillions, 33-year-old Michael Lazerow qualifies as a serial entrepreneur. Therefore, he says, he's well positioned to invest in one of today's most coveted asset classes: private equity. It involves companies that seize other companies, spruce them up and (fingers crossed) sell them for a profit years later. The investment category regained its popularity in 2006 when there were more than 1,000 announced private equity deals in the U.S.

"Most of the money is made in finding the right deal," says Lazerow, whose newest venture, Buddy Media, is a New York City application development firm that serves social networking websites. "It helps if you have experience in the industry [you invest in]."

While Lazerow makes it seem accessible, private equity has traditionally been, well, private. Its participants include mostly accredited (i.e., more than $1 million in the bank) and in-the-know individuals, as well as institutional investors, pension plans and university endowments with thousands if not millions to offer. In the past three years, Lazerow has bet on eight deals from $100,000 to $150,000 each.

Don't Have Millions?
Good news: The members-only asset club has opened its doors--albeit ajar--to include investors who don't need to be accredited and who don't want their money locked in for years. In July, Vista Research and Management issued The Listed Private Equity Plus Fund (LPEAX), an open-end mutual fund that lets investors enter for as little as $1,000. Rating agencies Morningstar and Lipper track the fund. "That's great news for us," says Steven Samson, the fund's chief investment officer. "As a mutual fund, it's important to build an investment record. It bodes well for this asset generation."

Jaron Nunez, who runs Avalon Home Mortgage in Newport Beach, California, has tucked away 3 percent of his retirement portfolio into LPEAX. He likes the mutual fund because his risk tolerance is low. If his investment drops 8 percent to 12 percent, he'll likely re-evaluate his position, he says. "I'm knocking on wood."

For a more liquid private equity investment vehicle, the PowerShares Listed Private Equity Portfolio (PSP) tracks the Red Rocks Listed Private Equity index, a composite of more than 30 publicly traded companies tied to private equity. PowerShares CEO Bruce Bonds says, "By and large, [Red Rocks] is based on the concept of listed private equity becoming a greater category in the future." Its shares are traded on the American Stock Exchange.

The Pure Plays
In 2007, a few private equity firms IPO'd on the New York Stock Exchange, among them Blackstone (BK) and Fortress Investment Group (FIG). However, experts say risk-averse investors should beware. Although these firms must disclose their financials with the SEC, they still lack a significant degree of transparency. "[Blackstone and Fortress] are still buying companies that are not public, and they don't have to tell you much about them," says Steve Kaplan, a professor of finance and entrepreneurship at the University of Chicago. Legislators are also pushing to raise the tax rate on investment partnerships from 15 percent to 35 percent. The move may affect earnings and, ultimately, a private equity firm's stock. Kaplan recommends "being cautious rather than aggressive."

Farnoosh Torabi is acorrespondent for TheStreet.com TV.

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This article was originally published in the December 2007 print edition of Entrepreneur with the headline: A Private Affair .

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