- The mechanics of private market investing
- What are private markets?
- How private markets differ from public markets
- The private market ecosystem: GPs, LPs, and portfolio companies
- Types of private market investments
- The investment vehicle: How private market funds work
- The traditional fund structure
- The special purpose vehicle (SPV)
- The strategic advantages and operational risks of private market investing
- Bridging the infrastructure gap
- The operational engine: Unifying private market investing with technology
- Frequently asked questions about private market investing
- Who can invest in private markets?
- What is an example of a private market investment?
- How long is money tied up in a private investment?
- What are typical return expectations for private market investments?
- How is GP compensation structured?
What are private markets?
Private markets are the ecosystem where equity and debt in privately-owned companies are bought and sold. This activity happens entirely outside of public exchanges like the NYSE or Nasdaq, where public company stock is traded on the open market. This is the environment where many of the most innovative companies raise capital and continue scaling while still private; in 2025 alone, startups on the Carta platform raised nearly $119.5 billion in new funding, a 16.9% increase year over year.
These alternative investments are not traded on an open exchange, which means the way they are managed is fundamentally different from public stocks and bonds. This distinction requires a specialized set of processes, expertise, and infrastructure to navigate successfully. If you invest in the public market, you can buy and sell shares with a few clicks. In the private markets, transactions are complex, negotiated deals that take time and specialized knowledge to execute.
How private markets differ from public markets
To grasp how private market investing works, it’s helpful to first understand the key differences between public and private markets. A simple comparison can clearly illustrate the core distinctions that define this unique investment landscape. These differences affect everything from who can invest to how long your money is committed.
Aspect | Public markets | Private markets |
Who can invest? | The general public | Typically restricted to an accredited investor (individual investors who meet specific criteria) or institutional investors |
Liquidity | High (assets can be bought and sold easily) | Low (capital is locked up for many years, often providing an illiquidity premium) |
Regulation | Heavily regulated with required public disclosures | Less regulated with limited information disclosure |
Available companies | A limited number of large, established companies | A vast population of businesses, from young early-stage startups to established companies |
The private market ecosystem: GPs, LPs, and portfolio companies
The private market is not a place of anonymous transactions but rather a network built on professional relationships between key participants. Think of it as a three-legged stool, where each leg is essential for stability and success. Understanding these roles is fundamental to understanding how private capital flows and investment decisions are made.
The three core participants in this ecosystem are:
General partners (GP): These are the investment professionals or firms that raise funds, find companies to invest in, and actively manage those investments. They are responsible for fund management and operations, acting as the hands-on managers of the investors' capital.
Limited partners (LP): These are the private market investors who commit capital to a fund for the GPs to invest on their behalf. LPs can be large institutions like pension funds and university endowments, or high-net-worth individuals who provide the fuel for the investment engine.
Portfolio companies (portco): These are the private companies that receive investment capital from the fund. In exchange for funding, they provide the fund with an ownership stake (equity) or agree to repay a loan (debt), becoming part of the fund's portfolio.
The relationship between these players is governed by a legal contract called the limited partnership agreement (LPA). This detailed document sets the rules for the fund, including its investment strategy, the management fees the GP can charge, and the fund's expected lifespan. It is the foundational document that ensures all parties are aligned.
Types of private market investments
GPs can pursue many different strategies when investing the capital from their LPs. These strategies determine the types of companies they invest in, the stage of a company's life they focus on, and the role they play in those companies' growth. Each strategy comes with its own risk and return profile.
Here are the most common types of investments:
Private equity (PE): This strategy typically involves purchasing a significant or majority ownership stake in a mature, established private company. The goal of a PE firm is to actively improve the company's operations and financial health to sell it for a profit later, often by using growth equity strategies and buyouts to expand into new markets.
Venture capital (VC): This strategy focuses on making minority-stake investments in young, high-growth companies, often called startups. VC investing follows a power-law model where many portfolio companies may fail, but a few exceptional outcomes drive returns; this model of concentrated returns is validated by market data showing exits of $500 million or more accounted for nearly 79% of total exit value in the past year. As one GP puts it, most VCs are power-law investors pursuing “multibillion-dollar exits” even though “the probability of all those companies succeeding is very low.”
Private credit: This strategy, also known as private debt or direct lending, involves lending money directly to companies, rather than buying an ownership stake. For example, a direct lending fund might provide a $50 million loan to a mature software company for expansion, earning returns through interest payments and principal repayment over a fixed term. This approach provides a more predictable income stream compared to equity investing, where returns depend on the company's growth and eventual exit.
Real estate and real assets: Beyond corporate equity and debt, many managers focus on tangible property and infrastructure investments, such as commercial real estate, apartments, and energy projects. These assets represent another significant category within the broader private markets.
The investment vehicle: How private market funds work
To pool money from LPs and invest in companies, GPs create legal entities known as private investment funds. Think of these vehicles as the containers that hold and deploy the investment capital. The structure of the vehicle is chosen based on the GP's strategy and the specific investment opportunity.
The two most common structures you'll encounter in the private markets are the traditional fund and the special purpose vehicle (SPV). Each serves a different purpose and offers unique advantages.
The traditional fund structure
A traditional closed-end fund is a large, pooled investment vehicle designed to invest in a portfolio of multiple companies over a long period, often a decade or more. "This structure allows GPs to build a diversified portfolio that aligns with a single, overarching investment thesis.
This is the standard model for most large-scale PE and VC firms. It provides them with a large pool of committed capital that they can deploy over several years as they find suitable investment opportunities.
The special purpose vehicle (SPV)
A special purpose vehicle (SPV) is a smaller, more focused investment vehicle created to make a single investment in one specific company. This structure offers a great deal of flexibility and is used for a variety of strategic reasons, including co-investments and follow-on investments.
For example, an emerging manager might use a deal by deal strategy to build an investment track record. This was the path taken by High Circle Ventures, which used SPVs to launch its VC firm and demonstrate its investment thesis to potential LPs. An established fund might also use an SPV to pursue a unique opportunity that falls outside its main fund's strategy, allowing it to be nimble and opportunistic.
The strategic advantages and operational risks of private market investing
Investors are drawn to private market assets for several key reasons that public markets often cannot provide. However, these advantages come with a unique set of operational risks and administrative burdens for the fund managers who facilitate them.
The primary advantages for investors include:
Potential for higher returns: Private market investments have historically offered strong performance, and the return potential of the asset class is expected to outperform public markets over the long term due to its ability to support high-performing businesses. This is often seen as a reward for the lower liquidity and longer time horizons involved, though data on VC returns shows that outcomes are highly concentrated, with 95% of returns earned by just 5% of investors.
Access to innovation: Investing in private markets allows you to gain exposure to groundbreaking companies and new technologies before they become available to the general public. You are investing in the growth story of tomorrow's leading companies.
Portfolio diversification: Private assets do not always move in lockstep with public equities, and this low correlation—often resulting in lower volatility compared to public indices—is why they can play a diversification role in portfolio construction. In Q1 2023, for example, the Nasdaq Composite rose 18% and the Nasdaq 100 rose 22%, yet public and private diverged as late-stage private valuations moved in the opposite direction.
While LPs see these advantages, GPs and their finance teams face significant operational risks. These include ensuring regulatory compliance, performing rigorous due diligence, avoiding reporting errors, and managing the sheer volume of manual work required to run a fund, all while navigating an environment where regulators can conduct examinations of their books and records. As funds grow, these investment management complexities multiply.
Bridging the infrastructure gap
These operational hurdles—from tracking LP commitments on spreadsheets to manually calculating complex distribution waterfalls and cash flows—represent a significant infrastructure gap in the private markets.
To learn how modern fund managers are overcoming these challenges to gain control, boost efficiency, and deliver superior service, download Carta’s whitepaper.
The operational engine: Unifying private market investing with technology
The operational complexities of private market investing demand a modern solution. Technology platforms are becoming the essential infrastructure that helps fund managers navigate risks, increase efficiency, and scale their operations effectively. A fragmented approach built on spreadsheets and disconnected service providers is no longer sustainable, because it creates real execution risk. Among smaller VC funds, about 12% of capital calls are paid at least one week late and 5.2% are paid at least one month late, showing how late capital calls can disrupt operations and strain LP relationships.
Carta’s core perspective is that by centralizing fund data and automating routine tasks with products like Carta Fund Administration, fund professionals can be empowered to move from back-office administration to strategic decision-making. This shift allows them to focus their time and expertise on generating returns rather than managing manual processes.
For firms like Kapor Capital, moving to a software-enabled admin was critical because “there weren’t great insights or metrics” in its previous platform, and the lack of an “easy-to-use layout” proved a significant pain point. A modern platform provides the visibility and control needed to manage a fund effectively.
A unified platform also creates a superior and more transparent investor reporting experience. The Carta LP Portal provides LPs with a single, secure place to view their investments, sign documents, and access financial reports, which helps build the trust and confidence that is foundational to the GP-LP relationship.
To see how a modern platform can streamline your fund operations, request a demo.
Frequently asked questions about private market investing
Who can invest in private markets?
Private market investments are generally available only to accredited investors. These are individuals, such as a qualified purchaser, or institutions that meet certain income or net worth requirements as defined by financial regulators.
What is an example of a private market investment?
A VC fund investing in a technology startup's priced rounds is a classic example of a private market investment. In this case, the fund provides capital to help the young company grow in exchange for an ownership stake.
How long is money tied up in a private investment?
Private market investments are illiquid, meaning your capital is typically committed for a long time. It is common for funds to have a lifespan of a decade or more, as it can take years for a private company to grow and achieve an exit like an acquisition, initial public offering (IPO), or secondary market transaction. This long-term investment horizon is necessary as these companies navigate various market cycles. While investors may seek higher returns, they must also accept the higher risk associated with long-term capital lockups and business failure.
What are typical return expectations for private market investments?
Return expectations vary significantly by strategy and fund performance. Venture capital funds target returns of 3x to 10x the invested capital, while private equity funds typically aim for 2x to 5x returns. However, actual returns are highly concentrated—data shows that 95% of returns are earned by just 5% of investors, meaning outcomes vary widely based on fund quality, market conditions, and portfolio company performance.
How is GP compensation structured?
General partners typically earn compensation through two mechanisms: management fees and carried interest. Management fees are an annual charge (typically 1.5% to 2.5% of assets under management) that covers the fund's operational costs. Carried interest, or carry, is a percentage of profits (typically 20%) that the GP keeps after returning all capital and preferred returns to LPs. This structure aligns the GP's interests with LP returns, as GPs only earn significant carry if their investments perform well.
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