By Jeff McClean
Private equity used to be the crown jewel of alternative investing. For years, the formula seemed simple: buy a company at a discount, use debt to fuel growth, and sell at a higher multiple. But times have changed. With recent news stories highlighting challenges facing the private equity business model – like this Bloomberg article titled “Some PE Firms Are Doomed to Fail as Once-Hot Industry Fizzles” – caution is in the air. And if you’re an investor looking at PE today, you need to know what you’re really getting into.
At Solidarity Wealth, we work with successful families who want more from their capital than just market returns. They’re hands-on. They’re experienced. And they’re asking sharper questions about how private equity fits into their overall plan. Spoiler: it’s not as straightforward as it used to be.
The Private Equity Playbook—And Why It’s Getting Harder
Most private equity firms operate on the same basic model: buy small to mid-sized companies using borrowed money, allegedly improve operations (or not), then sell those companies later at a higher price. The private equity financial engineering model worked beautifully when interest rates were low and capital was cheap.
But with rates higher, the cracks are showing. Debt isn’t as easy to float anymore. And that matters, because PE’s traditional return engine is built on leverage. In a recent study of 3,492 private equity transactions from 1993 to 2014, it was found that the average ratio of net debt to enterprise value in those transactions was approximately 65% at deal inception. For context, the typical Russell 2000 small-cap company is levered at about 16%.
If you’re buying a company at 7x earnings and aiming to sell at 15x, you better be able to afford the debt payments in between—or you’re stuck holding the bag!
Key Questions Before Investing in Private Equity
If you’re evaluating private equity investment strategies today, especially through a fund, there are a few things you should be evaluating right away:
- Operational experience: Are the people running the fund true operators or just financial engineers? The days of MBA-only teams playing spreadsheet games are over. In today’s market, funds need people who know how to roll up their sleeves and run companies better—not just buy and flip. To be blunt, these are skills that are more scarce than you think.
- Exit path clarity: PE is facing headwinds in the exit market. IPOs have been quiet, and M&A has slowed dramatically. Some funds have resorted to “continuation vehicles” or secondary structures to hold assets longer. Translation: your money could be tied up much longer than you expected.
- Fund duration: Historically, private equity funds ran 7–10 years. Now we’re seeing terms quietly extend to 12 or even 15 years. And here’s the kicker: you have no control. Once your capital is committed, it’s locked. You don’t get to opt out, pull back, or reallocate if things change. That rigidity might not align with the kind of wealth management for entrepreneurs or families who value flexibility and control.
Direct Private Equity vs. Fund Investing
We have clients who prefer going direct—joining a board, advising a management team, or even helping run the business. When done right, that hands-on involvement can lead to strong financial outcomes and personal fulfillment.
But direct investing isn’t for everyone. If you don’t have the operational background, the time, or the network, it’s easy to get caught up in hype or sentiment. That’s when funds can be valuable, if you choose the right one.
Still, be skeptical of glossy pitch decks and backward-looking IRRs. Ask questions. Push for transparency. Press them on their experience actually building better businesses through operational success. Make sure you understand not just how the fund made money during the days of low interest rates, but how it plans to do it again in a very different economic environment.
Real Returns vs. Public Markets
Let’s say you commit to a PE fund for 10 years, and it delivers a 2.3x return. Sounds decent until you compare it to public markets over the same period. Many investors underestimate how much private equity investments must outperform to justify the trade-offs in liquidity, access, and control.
My expectation is simple although controversial: if you’re locking up my money for a decade or more, I want to see at least a 3x return. That’s the minimum needed to justify the risk and lack of access.
Liquidity Isn’t Just a Detail, It’s the Point
As I mentioned in my article on venture capital, one of the biggest mistakes I see people make is confusing a strong balance sheet with a strong financial plan. Owning a bunch of private investments might look good on paper, but they don’t keep the lights on at your vacation home or pay for your daughter’s wedding next summer. This is why we help clients stress-test their private equity investment strategies as part of a holistic financial plan, ensuring they support both long-term growth and short-term flexibility.
We’ve had clients go all-in on private equity without realizing how long their capital would be inaccessible. And when markets shift (as we saw in 2022), they’re caught flat-footed, with no liquidity and no exit path.
That’s why we focus on balance—between cash-flowing assets, liquid reserves, and long-term growth plays. In our 5-Bucket Strategy, private equity lives all the way to the right: high risk, high return, and low liquidity. If you overfill that bucket, even for the right reasons, you can wind up limiting your flexibility when you need it most.
Be Thoughtful, Not Fearful
Private equity still has a place, but it’s not what it used to be. Today’s environment demands more scrutiny, more patience, and more realistic expectations.
So, if you’re considering private equity, start by asking the tough questions. And make sure you’re not just chasing the last decade’s success story. Your capital deserves a smarter playbook—one that aligns with your goals, timeline, and actual life.
Have questions about how private equity or other alternative investments fit into your overall strategy? Let’s talk. Reach us at info@solidaritywealth.com or call 385-374-1665.
About Jeff
For over a dozen years, Jeff McClean has advised some of the country’s most successful families on all aspects of their wealth. With his background as a former tax and estate planning attorney at a prominent Houston, Texas, law firm, Jeff has advised clients through business sales, funding rounds, IPOs, complex tax and wealth planning transactions, private and public market investments, executive compensation packages, succession planning, and much more. In short, Jeff helps clients navigate the unique challenges that come with building wealth and helps them better predict their financial future.
In addition to co-founding Solidarity Wealth, Jeff advises single-family offices on a broad array of challenges. He also serves as the Managing Partner of Solidarity Capital, an income fund managed separately by the Solidarity partners.
Jeff is a sought-after thought leader on a wide range of tax, finance, and estate planning topics. Jeff has appeared on CNBC, Bloomberg, and Fox Business, has been quoted in The Wall Street Journal, Barron’s, and Yahoo!Finance, has published in diverse publications from Silicon Slopes Magazine to the Taxation of Exempts Journal by Thomson Reuters, and spoken to endless professional groups and large company conferences.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor, with honors, from the University of Texas School of Law. Outside of work, Jeff is married and the father of three amazing children. He has also served as past president of the Salt Lake Estate Planning Council.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
