Small business owners often find their personal wealth and company prospects intertwined so closely that one misstep can imperil both. In an era of economic uncertainty and market volatility, this concentration risk demands a solution.

Private equity, long perceived as the domain of large institutions, offers a compelling answer for entrepreneurs and their businesses alike. By weaving PE into both your personal portfolio and your operating company, you can create a dual layer of protection and growth potential.

Understanding the Power of Diversification

Diversification means spreading investments across multiple asset classes and sectors to reduce risk and stabilize returns. For small business owners, the stakes are high:

• Operational concentration: revenue tied to one or two customers, products, or regions
• Financial concentration: net worth locked into company equity and debt
• External shocks: industry downturns or supply-chain disruptions can strike quickly

Citizens Bank emphasizes that diversification can mitigate risk by spreading your investments across different sectors and reduce the fallout from a downturn in any single vertical. By incorporating private equity alongside stocks, bonds, real estate, and mutual funds, owners can build multiple growth engines and improve overall stability.

Demystifying Private Equity

At its core, private equity is a pool of capital that invests in non-publicly traded companies, pairing funds with experienced operators to drive growth, enhance operations, and generate value before exiting the investment.

Key characteristics of private equity include:

• Active ownership with a hands-on approach to strategy, governance, and performance metrics
• Investment horizons typically spanning 4–7 years, with capital locked in during that period
• Strategies ranging from buyouts and growth equity to minority stakes and secondaries

Small and middle-market PE funds often target businesses with enterprise values between $1 million and several hundred million dollars, making them accessible partners for family-owned and founder-led ventures.

Private Equity in Your Investment Portfolio

When added to an investment portfolio, private equity can offer lower correlation to public markets thanks to different valuation practices and infrequent marking. Vanguard research shows that more than 85% of U.S. and international companies are not accessible through public markets, so a private equity allocation can expand equity market coverage across size, sector, and geography.

Modeling by Vanguard revealed that a 30% allocation to private equity within an equity sleeve boosted projected nominal annual returns by roughly 14.2%, while only increasing volatility by 10.5%. The result was a higher Sharpe ratio—indicating improved risk-adjusted performance compared to a traditional 60/40 portfolio in a rising interest rate and inflationary environment.

Leading asset managers like T. Rowe Price and Blue Owl reinforce these findings, arguing that private assets can enhance diversification and reduce overall volatility when paired with public equities and fixed income. EQT adds that PE often outperforms public markets during downturns, further stabilizing portfolios when traditional allocations falter.

Critics, notably UBS, caution that apparent diversification benefits may be a “framing illusion” driven by smoothed valuations and overlapping economic exposures. Small business owners should acknowledge that while PE offers unique deal structures and access, it does not create invulnerability to market factors such as interest rates, sector cycles, and macroeconomic shifts.

Partnering for Growth: PE and Small Businesses

At the operating company level, private equity firms have become steadfast partners for thousands of small and mid-sized businesses. According to the American Investment Council and PitchBook, in 2024:

• 4,949 U.S. small and mid-market companies received PE backing
• $654.1 billion was invested, over $100 billion more than the prior year
• In 2025, more than 21,000 businesses have engaged with private capital, 85% with under 500 employees

Private equity firms fill a critical funding gap as banks tighten lending standards. They support companies with:

• Opening new production facilities and funding strategic acquisitions
• Preserving and creating local jobs through operational improvements
• Succession planning and management transitions for retiring founders

Case studies abound: an advanced manufacturer expanding a Houston plant, a Pennsylvania health products maker scaling distribution, and a fintech platform accelerating growth through PE-backed acquisitions. Each success story highlights the value of capital, expertise, and strategic guidance when navigating supply-chain shifts and global trade uncertainties.

GF Data’s H1 2025 report shows that smaller deals in the $1M–$25M TEV range held up remarkably well, reflecting buyer confidence in asset-light, recurring-revenue models—especially in business services, a sector that accounted for nearly half of small transactions and commanded multiples above historical averages.

Navigating the Horizon: Trends and Outlook

The private equity landscape continues to evolve. Cherry Bekaert reports a 19% increase in deal value in 2024—the highest in two years—as valuation gaps narrow and exit conditions gradually improve. Bain, McKinsey, EY, and others note that more than 18,000 funds are seeking $3.3 trillion in capital, implying robust competition for quality assets and potential for an “exit volume explosion” in 2025.

This backdrop offers both opportunity and caution. Small business owners and investors must conduct thorough due diligence, align with partners who understand their industry, and maintain realistic expectations about timelines and returns. Yet those who navigate the landscape effectively can achieve accessing different segments and deal structures that traditional markets cannot deliver.

Conclusion

For small business owners, private equity is more than just an injection of capital—it’s a strategic vehicle for diversification, growth, and legacy planning. By integrating PE into your personal portfolio, you mitigate concentration risk and harness the potential of private markets. By welcoming a PE partner at the operating level, you unlock new resources and expertise to propel your company forward.

As the economic tides shift and global challenges persist, now is the time to explore private equity’s dual role in safeguarding your wealth and elevating your business. Embrace the possibilities, do your homework, and set a course toward lasting stability and success.