Small-time investors can get in on the private-equity action, but don't expect Romney-level returns. By Nellie S. Huang, Senior Associate Editor January 20, 2012 Mitt Romney's ascension as the front-runner for the GOP presidential nomination -- the race is his to lose at this point -- has put a spotlight on his lucrative career at Bain Capital and the world of private equity. His more vociferous opponents have called him a "vulture capitalist" and "corporate raider." SEE ALSO: What Romney Would Do as PresidentThe real rub may be that private equity has made Romney, who was already well-off, a very wealthy man. Indeed, it's the swirl of exclusivity that makes private equity such an easy target. Private equity and its potential for fat returns seem reserved for the 1%. The "portfolios" that these firms run usually require minimum investments of well into seven-figures -- not a sum the 99% can put up. As it turns out, however, there is an indirect way for regular Joes to get a piece of the private-equity pie. Advertisement First, what is private equity? Few of Romney's attackers, it seems, fully understand what the industry does. It's not investment banking -- when a bank assists a company in going public or helps one firm acquire another, for instance. And it's similar to but distinct from venture capital -- money that investors put into a start-up company that they hope will grow into a large and successful concern. These days, when people talk about private equity, they're usually talking about firms that take sizable stakes in established, and often privately held, distressed companies. The firms work with the companies, typically over several years, to turn them around and then sell them for a profit. Sometimes they borrow money to do so -- in addition to putting up cash -- which is why private-equity investments are sometimes called leveraged buyouts (or they were called that more often in the 1980s -- remember RJR Nabisco?). But the bottom line is, private-equity investors only make money if the companies their money buys improve their performance. It's about building businesses, not breaking them down. Of course, it's about making money, too. The potential payback on private-equity investments varies depending on who you ask, But with fat returns ranging between 16.4% annualized over ten years, according to one 2005 study by a British pension fund, and a mind-boggling 39% over the past 25 years (for the biggest private-equity funds), according to the industry's lobbying group, who wouldn't want in? Advertisement The problem is, chances are you're not rich enough: Public and private pension funds, university endowments and foundations account for 70% of the money in the top 100 private-equity firms. Who owns the other 30%? The really rich, as well as some insurance and bank holding companies. That's because in most cases, private equity deals fall under a Securities and Exchange regulation that requires investors be "accredited" or "qualified." For an individual to be accredited under the SEC rules, he or she must have income of more than $200,000 per year for the past two years ($300,000 for a married couple) -- and a reasonable expectation of making the same or more in the current year -- or have a net worth, excluding primary residence, of more than $1 million. The rules for being a qualified "purchaser" are even more stringent. You may already be benefiting -- albeit indirectly -- from private equity's high returns. Large pension funds, such as the California Public Employees Retirement System and the New York State Common Retirement Fund, invest in private equity funds. Another way to invest indirectly: Some of these private equity partnerships trade publicly, including KKR & Co. (symbol KKR), the LBO firm behind the RJR Nabisco deal, which was immortalized in the book Barbarians at the Gate. From KKR's initial public offering on July 15, 2010, through January 18, the stock returned 45.8%, compared with a 23.1% return for Standard & Poor's 500-stock index. The longer-term results for private-equity stocks aren't so cheery. Consider the one fund that gives the average investor entree into a diversified package of these companies. PowerShares Global Listed Private Equity ETF (PSP) invests at least 90% of its assets in publicly listed private-equity companies all over the world. Its top holdings include Leucadia National Corp. (LUK) and Blackstone Group (BX), two big U.S. private-equity firms. Over the past five years through January 18, the exchange-traded fund lost an annualized 15.6%. Standard & Poor's Financials Index did just as poorly, but the broad market, as measured by the S&P 500, broke even. (The ETF gets lumped with other financial-sector funds because private-equity firms are considered financial-services companies.) Advertisement The ETF's results last year were especially appalling. Hurt by large stakes in an unpopular sector and in foreign stocks (nearly 30% of assets in England, Sweden and France), the ETF lost 19.9%, compared with a 2.1% gain for the S&P 500. Interestingly, the ETF's underlying index was founded by two managers behind a mutual fund with a similar premise: to provide mainstream investors access to private equity. Adam Goldman and Mark Sunderhuse, of Red Rocks Capital, manage the ALPS/Red Rocks Capital Listed Private Equity Fund (LPEFX). The fund, which levies a 5.75% sales charge, dropped 18.2% in 2011. Should you invest in the PowerShares ETF? That 39% long-term annual return quoted by the industry's association is mighty appealing. The truth, though, is that although a private-equity company sinks or swims on the basis of the performance of its deals, its stock will trade more in line with the broader stock market -- or at least in line with other financial stocks. So in inhospitable markets of the sort we've experienced the past few years, returns of 39% a year are nothing more than a pipe dream.