Private equity (PE) is capital invested in companies that are not listed on public stock exchanges. PE firms raise money from institutional investors and wealthy individuals, use it to acquire or invest in private businesses, improve those businesses, and then exit — typically through a sale or IPO — to generate returns for their investors.
Global private equity assets under management exceeded $8 trillion in 2025, making it one of the largest alternative asset classes in the world.
Private Equity Strategies
| Strategy | What It Does | Typical Company Stage | Target Return |
|---|---|---|---|
| Leveraged Buyout (LBO) | Buys a company using mostly debt | Mature, cash-flow positive | 20–25% IRR |
| Growth Equity | Minority stake in fast-growing company | Established, pre-IPO | 15–20% IRR |
| Venture Capital | Early-stage startup investing | Startup / early-stage | 25%+ (home runs required) |
| Distressed / Turnaround | Buys struggling companies cheaply | Declining or bankrupt | 15–25% IRR |
| Real Estate PE | Buys, improves, and sells properties | Commercial/residential | 12–18% IRR |
LBOs are the most common large-deal strategy. A PE firm buys a company for, say, $1 billion — putting in $300M equity and financing $700M with debt. If the company’s value rises to $1.5B at exit, the equity investors return $800M on a $300M investment (167% gain), while debt holders are repaid from operating cash flows.
How the Private Equity Fund Life Cycle Works
- Fundraising (Year 1): PE firm raises capital commitments from investors (LPs)
- Investment period (Years 1–5): Capital is called and deployed into acquisitions
- Hold period (Years 3–7): Portfolio companies are operated and improved
- Exit (Years 4–10): Companies are sold (to another PE firm, strategic buyer, or via IPO)
- Distribution: Profits are returned to investors after fees
Investors do not get their money back in year 1 — capital is locked up for 7–10 years. This illiquidity is a key risk.
PE Fee Structure: “2 and 20”
Like hedge funds, most PE funds charge:
- 2% management fee on committed capital, even before it is invested
- 20% carried interest on profits above an 8% hurdle rate
Worked example: $10M fund commitment, 8% hurdle, fund exits at 15% net IRR
| Fee Component | Amount |
|---|---|
| Management fees (2% × 10 years × $10M) | $2,000,000 |
| Profits above hurdle (20% of gains) | Varies (often $1–3M on a $10M commitment) |
Fees significantly reduce net returns. Always compare net-of-fee IRR when evaluating funds.
Private Equity vs. Public Stock Returns
| Period | Top-Quartile PE Net IRR | S&P 500 Return |
|---|---|---|
| 1990–2000 | ~20% | ~18% |
| 2000–2010 | ~12% | ~1% |
| 2010–2020 | ~16% | ~14% |
| 2015–2025 (est.) | ~14% | ~13% |
Top-quartile PE funds tend to outperform public markets; median PE funds roughly match public markets after fees. Access to top funds matters enormously.
How Individual Investors Can Access Private Equity
| Vehicle | Min. Investment | Liquidity | Access |
|---|---|---|---|
| Fundrise / Yieldstreet | $1,000–$10,000 | Low | Anyone |
| Business Development Companies (BDCs) | ~$10 (stock price) | Daily (public exchange) | Anyone |
| PE ETFs (e.g., PSP, PEX) | ~$30 | Daily | Anyone |
| Interval funds | $25,000+ | Quarterly | Accredited |
| Traditional PE fund | $5M+ | Locked 10 years | Accredited only |
BDCs are the most accessible option — they trade on major exchanges like stocks, invest in private middle-market companies, and are required to distribute 90% of income to shareholders. Examples include Ares Capital (ARCC) and Blue Owl Capital.
Key Risks of Private Equity
- Illiquidity — capital locked for years, no ability to exit
- Leverage risk — LBOs use heavy debt; rising interest rates hurt returns
- Fee drag — 2% management fee and 20% carry significantly reduce net returns
- Vintage year risk — funds raised at market peaks (2006–2007) badly underperformed
- Valuation opacity — private company values are not marked to market daily; losses can be hidden until exit
See the Investment Portfolio Basics guide for how alternative assets fit within a broader portfolio strategy.
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