What is private equity?

Explanation of private equity

Private equity is a form of investment where capital is deployed into businesses that are not publicly listed, with the aim of generating returns through growth, operational improvement, or strategic change. Investments are usually made by private equity firms on behalf of institutional investors, such as pension funds, and high net worth individuals.

These investments are structured through funds with a defined lifecycle, during which capital is invested, managed, and eventually realised through an exit, such as a sale or listing. Private equity firms often take an active role in governance, working closely with management to influence strategy and performance.

In a UK context, private equity is a significant component of the mergers and acquisitions landscape, supported by regulatory, tax, and reporting frameworks including IFRS and UK GAAP, such as FRS 102. It is commonly associated with transaction types such as management buyouts, leveraged buyouts, and growth capital investments.

Key characteristics of private equity

Key characteristics of private equity include the following:

• It involves investment in companies that are not publicly traded.
• It is typically structured through funds with a defined investment lifecycle.
• It often includes active ownership and involvement in business strategy.
• It targets value creation through growth, efficiency, or restructuring.
• It relies on exit events to realise returns for investors.
• How private equity works
• Capital is raised from investors and committed to a private equity fund.
• The fund invests in selected businesses over an investment period.
• The private equity firm works with management to develop and execute a value creation strategy.
• Investments are realised through exits, returning capital and gains to investors.

Example of private equity in practice

A UK private equity firm raises a fund from institutional investors and acquires a majority stake in a mid-sized services company. Over several years, it supports expansion and operational improvements before exiting the investment through a sale to another investor.

Related terms

• Management buyout (MBO)
• Leveraged buyout (LBO)
• Venture capital
• Due diligence
• Exit multiple
• Internal Rate of Return (IRR)
• Carried interest

Common misconceptions about private equity

• Private equity does not only involve large transactions, as investments can range from small growth capital to large buyouts.
• Private equity does not operate without oversight, as funds are subject to governance, regulatory, and investor reporting requirements.

Frequently asked questions about private equity

What is private equity?

Private equity is investment in privately held businesses with the aim of generating returns through growth, operational improvement, and eventual exit.

How do private equity firms make money?

Returns are generated through increases in business value over time and realised through exits such as sales or public listings.

What types of companies do private equity firms invest in?

Private equity firms invest across a range of sectors and sizes, including established businesses, growth-stage companies, and turnaround situations.

What is the difference between private equity and venture capital?

Private equity typically focuses on more established businesses, while venture capital invests in earlier-stage companies with higher growth potential.

What is an exit in private equity?

An exit is the process of selling or realising an investment, allowing the fund to return capital and profits to its investors.