Private equity

Private equity (PE) is investing in companies that are not listed on a public stock exchange. A PE fund pools money from investors, buys established private (or soon-to-be-private) businesses, works to improve them over several years, and then sells them — through a trade sale or a public listing — aiming for a profit.

How the model works

The classic PE strategy is the buyout: acquire a mature company, often using borrowed money (leverage), improve its operations, profitability and management, then exit at a higher value. Investors are limited partners (LPs) who commit capital; the firm running the fund is the general partner (GP).

The fee structure to understand

PE famously charges "2 and 20" — roughly a 2% annual management fee plus 20% of the profits above a hurdle (the carried interest). These fees are a serious drag, so the gross returns must be high just to beat a cheap index fund after costs.

The risk and return profile

• Return: targets returns above public equities, as the reward for illiquidity and effort. Dispersion between top and bottom funds is enormous — the average is far less impressive than the headlines.
• Risk: leverage amplifies losses; individual companies can fail; you are betting on the GP's skill.
• Liquidity: very low. Lock-ups of 7 to 12 years, with capital called in instalments.

How a retail investor can access private equity

• Listed PE firms — buy shares of the publicly traded management companies (indirect, equity-correlated).
• Listed private-equity investment trusts / BDCs — vehicles giving diversified exposure on an exchange.
• Private funds — in Brazil, FIPs (fundos de investimento em participações), typically gated to qualified or professional investors with high minimums and long lock-ups.
• Interval and evergreen funds — newer semi-liquid structures lowering minimums; read the redemption terms carefully.