Understanding Private Equity

Private equity refers to the acquisition of equity stakes in unlisted companies. Institutional investors and, increasingly, individual investors provide capital to these companies and receive equity stakes—either majority or minority—in return. What sets this asset class apart is that the funds not only provide capital but also strategic and operational expertise designed to support the company’s growth over several years.

These transactions take many different forms. Venture capital funds finance young companies and startups still in the early stages of development. Growth capital comes into play later, to accelerate expansion. Next come buyouts involving the acquisition of a majority stake, sometimes structured with moderate use of debt and referred to as leveraged buyouts ( LBO s). Finally, turnaround capital works alongside experienced management teams to help turn around companies facing financial difficulties.

Private equity funds generally follow a long-term development plan, with the goal of growing the company over several years and thereby building value. Once this plan is successfully implemented, the holdings are divested, usually after five to seven years: through a sale to another fund, an initial public offering (IPO), or—most commonly—a sale to a strategic buyer capable of maximizing synergies. Long reserved for pension funds, insurers, and sovereign wealth funds, this asset class is now opening up to high-net-worth individuals and family offices, attracted by the prospect of long-term returns, lower volatility than the equity markets, and the opportunity to provide long-term support to companies in the real economy.

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