Private equity
What is Private equity?
Private equity is ownership capital invested outside public markets, commonly through funds that acquire, influence, grow, restructure, or eventually exit private companies.
Portfolio planning must treat commitments rather than current NAV as the economic exposure. Cash flows are endogenous: managers may call capital when public assets are weak and delay exits when markets close. Investors should model overcommitment, recycling, extensions, continuation vehicles, foreign exchange, and secondary-sale discounts. A reported premium is valuable only after fees and after adjusting carefully for leverage, sector, company size, valuation timing, and illiquidity.
How funds work
Investors commit capital to a limited-life partnership, and the manager calls it over an investment period. Strategies include buyouts, growth equity, and special situations. Portfolio companies are held for years and exited through sales, recapitalizations, or public offerings. Investors generally cannot redeem on demand and may remain exposed beyond the stated term.
Value creation
Returns can come from revenue and margin growth, operational change, acquisitions, deleveraging, multiple change, and financial structuring. Buyouts often use portfolio-company debt, which amplifies gains and losses. Separating operating improvement from leverage and market multiple expansion is essential when judging manager skill and the repeatability of historical results.
Performance measurement
Internal rate of return is sensitive to cash-flow timing, while multiple on invested capital measures total value relative to contributed capital without time. Interim NAV relies on valuation judgment. Compare vintage, strategy, geography, currency, leverage, and cash flows, using public-market equivalents where appropriate. Subscription credit lines can improve reported IRR without changing underlying economics.
Due diligence
Assess team, sourcing, sector expertise, operating resources, deal attribution, valuation, leverage, exits, fees, carried interest, governance, conflicts, and portfolio concentration. Review realized and unrealized investments separately and reconstruct gross-to-net returns. Examine continuation funds, related transactions, allocation across vehicles, and whether marks align with later exits.
Risks and practical checklist
Private equity faces illiquidity, leverage, capital calls, valuation uncertainty, concentration, key-person, economic-cycle, exit, and fee risk. Model commitment pacing and unfunded obligations under stressed distributions. Diversify vintages deliberately, preserve liquidity, and expect long duration. Do not equate smooth quarterly marks with low risk or top-quartile claims with persistent future performance.
Sources and further reading
- Private Equity Funds, Investor.gov, U.S. Securities and Exchange Commission
- Investments in Private Capital: Equity and Debt, CFA Institute