Private equity · Global
Private equity explained
How private equity funds buy, improve and sell companies, and what investors should know.
Summary
Private equity means investing in companies that are not listed, usually by buying a significant stake, working to improve the business, and selling it years later.
- Funds typically hold investments for several years before selling.
- Returns depend on how the business performs and the price at exit.
- Leverage, fees and the manager's skill have a large effect.
How does private equity work?
A manager raises capital from investors, buys stakes in companies, and aims to sell them for more than it paid.
Investors commit capital to a fund. The manager selects companies, often takes a controlling stake, and works with management to try to grow or improve the business. The investment ends when the company is sold or floated, and proceeds are returned to investors.
What types of private equity are there?
Common types include buyouts, growth equity and, as a separate area, venture capital.
Buyouts acquire mature companies, often using borrowed money. Growth equity backs companies that are already established and expanding. Venture capital backs young companies and is a different risk profile, covered in its own article.
Where do returns come from?
Returns come from growing the business, improving margins, paying down debt and selling at a higher price.
Borrowing can magnify results in both directions. Returns are uncertain, and results vary widely between managers. Fees, including management and performance fees, reduce what investors keep.
What should investors consider?
Consider the manager's track record, the strategy, the fees, the term and the level of concentration.
Funds can take years to invest and years to return capital. Look at how the manager has handled difficult periods, not only good ones, and how valuations are set between sales.
Frequently asked questions
How long does a private equity investment last?
Usually several years, set by the fund or deal terms.
What is a buyout?
Buying a company, or a controlling share of it, often with a mix of equity and borrowed money.
Is private equity the same as venture capital?
No. Venture capital is a subset focused on early-stage companies and usually has a higher risk of total loss.
Can I withdraw early?
Usually not. Capital is generally committed for the term of the fund or deal.
This article is general information for eligible investors. It is not investment advice or an offer. Capital is at risk. See our Terms and Risk warning.
