What is private equity?

Private equity (PE) refers to investments made in privately held companies by dedicated firms that fundraise and deploy capital specifically for this purpose. The companies that private equity firms invest into are typically not listed on public stock exchanges and thus not necessarily available to all types of investors.

Private equity firms raise capital typically from institutional investors, like endowments, pension funds, and ultra-high-net-worth individuals. The investors who allocate their capital to private equity funds are typically referred to as limited partners (LPs). These limited partners provide the majority of the capital in a private equity fund and, in return for their investment, receive ownership interests and share in the profits generated by the fund’s investments.

The private equity firms actively manage their portfolios of companies to realize potentially substantial returns. They may be involved in operational improvements and expansion initiatives to help the companies in which they’re invested grow. 

Returns can typically be realized when private companies are either sold or go public.

While getting in on companies from the ground up offers investors the potential for high returns, private equity investments do tend to involve higher risks. They are characterized by less liquidity compared to traditional public market investments, and the investment horizon is also typically longer compared to public markets.