Private equity
Private equity is an ownership model in which investment funds acquire interests in companies and seek to create value through governance, strategic change, operational improvement and eventual exit.
Definition
Private equity refers to professionally managed equity investment in private companies or public companies taken private, generally through closed-end funds with defined investment periods, governance rights and realization strategies.
Market structure
Investors commit capital as limited partners to a fund managed by a general partner. The manager sources, acquires and oversees portfolio companies, often using acquisition debt. Returns arise from operating improvement, growth, multiple change, deleveraging and realization through sale, listing or another transaction.
Strategies
Buyout
Control investment in established companies, commonly supported by leverage and an active ownership plan.
Growth equity
Minority or control capital for expanding businesses, typically with less leverage than buyouts.
Specialist strategies
Sector-focused, small-cap, turnaround, technology, healthcare and other differentiated mandates.
Investment lifecycle
- Fundraising: define strategy, terms and investor commitments.
- Origination: identify businesses matching the mandate.
- Underwriting: test value, financing, downside and ownership thesis.
- Ownership: govern the company and execute the value-creation plan.
- Exit: realize value through strategic sale, sponsor sale, listing or continuation structure.
Economics and governance
| Element | Function | Principal concern |
|---|---|---|
| Management fee | Supports investment and operating platform | Cost and basis of calculation |
| Carried interest | Shares investment profits with manager | Alignment, hurdle and waterfall |
| Leverage | Finances acquisition and can amplify equity returns | Downside, liquidity and refinancing risk |
| Governance rights | Enable active ownership and control | Accountability to company and investors |
Private equity is illiquid and valuation is partly model-based between transactions. Fund performance should be assessed across vintage, cash flows, realized and unrealized value, leverage and strategy rather than from a single headline return measure.
Related concepts
Sources and further reading
View sources and editorial notes
- Institutional Limited Partners Association, principles and reporting templates.
- International Private Equity and Venture Capital Valuation Guidelines.
- Relevant securities and private-fund regulatory authorities.
Editorial note: This entry describes private-equity market structure and is not an assessment of any fund or investment strategy.