Table of Contents
- Understanding Private Equity
- Key Takeaways
- What Is Private Equity?
- Private Equity Specialties
- Private Equity Deal Types
- How To Invest in Private Equity
- How Private Equity Creates Value
- Making Money With Debt
- Why Private Equity Draws Criticism
- How Are Private Equity Funds Managed?
- History of Private Equity Investments
- Are Private Equity Firms Regulated?
- The Bottom Line
Understanding Private Equity
Let me explain private equity to you directly: it's an investment class where firms like mine would raise capital to acquire and manage private companies or take public ones private, all with the aim of selling them later for a profit. These investments demand significant capital commitments from you over several years.
Private equity involves investment partnerships that buy and manage companies before selling them. Firms operate these funds on behalf of institutional and accredited investors like pension funds or wealthy individuals.
These funds might acquire entire private companies or public ones, or join consortia for buyouts. They usually avoid holding stakes in companies that stay listed on stock exchanges.
You'll often see private equity grouped with venture capital and hedge funds as alternative investments. As an investor, you're typically required to commit substantial capital for years, which limits access to institutions and high-net-worth individuals.
Key Takeaways
Private equity firms buy and overhaul companies to earn profits or break them up and sell parts. Capital for these acquisitions comes from outside investors in the funds we establish and manage, often supplemented by debt—some or all of which gets placed on the acquired company's balance sheet.
The industry has grown rapidly and tends to thrive when stock prices are high and interest rates low. Depending on the firm's skills and goals, an acquisition can make a company more competitive or burden it with unsustainable debt.
What Is Private Equity?
Unlike venture capital, most private equity firms and funds invest in mature companies rather than startups. We manage portfolio companies to increase their worth or extract value before exiting years later.
Firms raise client capital to launch funds and act as general partners, managing investments for fees and a share of profits above a hurdle rate.
The industry has seen swings recently. In 2024, buyout values rebounded 37% to $602 billion, showing resilience. Global deal volume rose 22% to $1.7 trillion, though still below pandemic levels.
But headwinds persist: assets under management fell 2% to $4.7 trillion in 2024, the first decline since 2005. This highlights challenges with a $3 trillion backlog of unsold deals. Distribution rates dropped to 11% of net assets, the lowest in over a decade, leading pension funds to pull back.
Holding periods have lengthened to five or more years from 4.2 years earlier. This frustrates investors, with some criticizing the inability to exit and return capital. Continuation funds are controversial, and fundraising dropped 23% in 2024.
Private Equity Specialties
Some firms specialize in specific private equity deals. Venture capital stands apart with its own firms dominating that sector. Other specialties include distressed investing for struggling companies, growth equity for expanding firms beyond startups, sector specialists focusing on tech or energy, secondary buyouts between PE firms, and carve-outs of corporate units.
Private Equity Deal Types
Deals fall into categories based on circumstances. The buyout is a staple, acquiring an entire company—public, closely held, or private. For underperforming public companies, we cut costs and restructure operations.
Carve-outs involve buying a division from a larger company, often noncore. These fetch lower valuations but can be complex and riskier, like Carlyle's 2014 acquisition from Tyco or Francisco Partners' 2022 deal from SAP.
In secondary buyouts, one PE firm buys from another, common with specialization. Other exits include selling to competitors or going public via IPO.
How To Invest in Private Equity
If you're interested in private equity exposure, options depend on your status, capital, and risk tolerance. Traditional funds are for institutions and ultra-high-net-worth individuals, requiring $5-10 million minimums and 10+ year commitments.
More accessible: publicly traded firms like Blackstone, KKR, Apollo, and Carlyle offer exposure through brokerage accounts, though their stocks don't perfectly track fund returns.
ETFs like Invesco Global Listed Private Equity ETF provide broad exposure. Before investing, note the illiquidity, '2 and 20' fee structures, tax issues, and varying performance—manager selection is key.
How Private Equity Creates Value
By acquisition time, we have a plan to increase value, perhaps through cost cuts or restructuring that prior management avoided. With limited time before exit, we're incentivized for major changes.
We might bring expertise, adopt new tech, or enter markets. We could install our team or retain managers to execute plans. Without quarterly pressures, management can take a long-term view, unless it conflicts with return goals.
Making Money With Debt
Operational improvements are now the main focus for added value, per surveys. But debt remains key, reducing equity needs and boosting returns with added risk. We might have the company borrow for dividend recapitalizations to accelerate our returns.
Why Private Equity Draws Criticism
Criticism has intensified, especially in healthcare. A 2025 Senate report found private equity ownership harms patient care in underserved areas through understaffing and closures.
Firms like Leonard Green extracted millions from hospitals, leading to closures and lost care. Impacts extend to communities via staff cuts and restructurings prioritizing short-term gains.
In retail, PE drove bankruptcies and job losses—20% of takeovers ended in bankruptcy, 10 times the non-PE rate. PE caused 56% of large 2024 bankruptcies, laying off 66,000.
How Are Private Equity Funds Managed?
A fund is managed by a general partner, usually the PE firm, making all decisions and contributing 1-3% capital. They earn 2% management fees and 20% carried interest. Limited partners invest with limited liability.
History of Private Equity Investments
It started in 1901 with J.P. Morgan's $480 million buy of Carnegie Steel. In 1919, Ford borrowed to buy out partners. KKR's 1989 $25 billion RJR Nabisco buyout remains the largest adjusted for inflation.
Are Private Equity Firms Regulated?
Funds are exempt from some SEC regulations, but managers follow the Investment Advisers Act and anti-fraud laws. In 2022, SEC proposed quarterly statements and audits for private fund advisors.
The Bottom Line
Private equity is at a crossroads in the mid-2020s, facing challenges despite growth projections to $1.2 trillion by 2033. Low distributions at 11%, regulatory scrutiny, and criticism over financial engineering fuel debates on oversight.
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