Private equity is ownership investment in companies outside the public markets — acquiring, funding, and eventually selling private businesses through professionally managed funds. The term covers a spectrum from control buyouts of established companies to minority growth stakes to early-stage venture, unified by the fund structures and long horizons the strategies share.
The strategy spectrum and the machinery
The family, in rough order of company maturity: venture capital (early-stage, power-law returns), growth equity (minority stakes in proven, expanding companies), and buyouts — the segment “private equity” most often means — where funds acquire control, typically via leveraged buyout, and drive returns through operational improvement, debt paydown, and exit pricing. Around the core sit secondaries (buying existing fund stakes), co-investments, and continuation funds — the liquidity layer a maturing asset class grew.
The machinery is the classic GP/LP drawdown fund: ~10-year lives, capital calls, management fees plus carried interest over a preferred return, performance measured by MOIC/DPI and IRR through the J-curve, and K-1 tax reporting. The honest performance framing has two halves: the asset class’s long-run outperformance of public equities is real but debated at the edges (benchmark choice, leverage adjustment, smoothed volatility), while manager dispersion is beyond debate — the top-to-bottom quartile gap dwarfs public-fund differences, making selection and access the actual investment decision. Structural headwinds worth naming plainly in the current cycle: elevated entry multiples, costlier leverage than the 2010s, and slowed exits that stretched holding periods and starved LPs of distributions — the conditions behind the secondaries and continuation-fund boom.
Access for advised clients has broadened fast: feeder platforms aggregating into institutional funds (qualified purchaser tier), registered PE access vehicles — commonly tender offer funds — and evergreen semi-liquid PE products at accredited or lower eligibility. Each wrapper trades some illiquidity-premium purity for accessibility and adds fees the dispersion math must overcome; matching wrapper, eligibility, and liquidity to the client is the advisor’s half of the underwriting.
FAQ
What is private equity in simple terms?
Funds that buy and build private companies — from startups to established businesses — aiming to sell them for more, with investors’ capital locked in for years while it happens.
How do private equity firms make money?
Management fees on the fund plus carried interest — typically 20% of profits above a preferred return. The underlying returns come from growing earnings, paying down deal debt, and exit pricing.
Can individual investors buy private equity?
Increasingly: feeder funds, registered access vehicles, and evergreen products reach accredited investors and below — with fee stacking and manager selection determining whether the access is worth having.
Related terms
Leveraged Buyout (LBO) · Venture Capital · Growth Equity · Secondaries · MOIC · J-Curve
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
