What is private equity?

Most investing you hear about happens in public markets — buying shares anyone can trade. Private equity operates in the shadows next door: buying whole companies that aren’t listed, fixing them up away from the glare of quarterly earnings, and selling them for a profit years later.

The private equity model

PE firms raise money from big institutions — pension funds, university endowments — into funds with a fixed life, typically around 10 years. The rhythm is consistent: in the first few years the fund buys companies; in the middle years it works to improve them; and by years eight to ten it sells them ("exits"), returning the capital plus profits to investors. The trade-off is illiquidity — investors can’t get their money out before the fund’s term ends. They’re locked in for the long haul.

Buyouts: the classic PE deal

The signature private-equity transaction is the leveraged buyout (LBO). The fund buys a company using a mix of its own money (equity, maybe 30–40%) and a large amount of borrowed money (debt, 60–70%). That debt sits on the acquired company’s own balance sheet, and the company’s cash flows are used to pay it down. As the debt shrinks and the business grows, the equity portion becomes far more valuable — this is the "leverage effect" that can turn solid returns into spectacular ones (and magnify losses if it goes wrong).

The wider family: growth equity and venture capital

Buyouts are just one flavour. The broader private-investing world spans a risk spectrum:

• Venture capital backs early-stage startups. A fund might expect most of its bets to fail, a few to break even, and one "home run" to return 50–100× and carry the whole fund.
• Growth equity takes minority stakes in established, profitable companies that need capital to scale — usually with little or no debt, earning returns from growth rather than financial engineering.
• Buyouts sit at the mature end: whole, established companies bought with leverage.

How PE measures success

PE has its own scorecard. The two headline figures are IRR (internal rate of return, which annualises the return accounting for timing) and MOIC (multiple on invested capital — a "2× MOIC" simply means you doubled your money). A fund aiming for, say, a 25% IRR is targeting returns well above what public markets typically deliver — the reward, in theory, for the illiquidity and the risk involved.