Private equity is an asset class built on a simple premise: buy private companies, make them more valuable, sell them. The execution is anything but simple.
How Private Equity Works
A PE fund is structured as a limited partnership. The general partner (GP) manages the fund and makes investment decisions. Limited partners (LPs) commit capital but have no say in day-to-day operations. When the GP identifies a deal, it issues a capital call to draw down LP commitments.
Most buyout funds use leverage to amplify returns. A typical acquisition might use 50-70% debt and 30-50% equity. The fund holds the company for three to seven years, improves it operationally or financially, and exits through a sale, IPO, or recapitalization.
Fund Economics
The standard fee structure is “2 and 20”: a 2% annual management fee on committed capital and 20% carried interest on profits above the hurdle rate, typically 8%. The distribution waterfall governs how profits flow between GPs and LPs.
According to Bain & Company’s Global Private Equity Report, global PE assets under management surpassed $8 trillion as of 2024, making it the largest segment within private alternatives.
Strategies Within Private Equity
PE is not monolithic. The major sub-strategies include:
- Buyout - Acquiring controlling stakes in mature businesses, often using leverage. This is the largest PE category by AUM.
- Growth equity - Minority or majority investments in established companies that need capital to scale, with little or no debt.
- Distressed - Buying the debt or equity of troubled companies at a discount, then restructuring for value.
- Secondaries - Purchasing existing LP positions or GP-led portfolio interests from other investors.
Each strategy carries a different risk-return profile and J-curve shape. Buyouts tend to show returns in years four through seven. Growth equity can distribute earlier. Distressed timelines are harder to predict.
How PE Funds Raise Capital
Fundraising follows a structured process. The GP prepares a private placement memorandum, opens a data room, and conducts a roadshow targeting institutional investors such as pension funds, endowments, and family offices.
Most funds hold a first close once they reach a critical mass of commitments, then continue raising toward their hard cap. The entire fundraise can take 12 to 24 months, depending on the GP’s track record and market conditions.
Why Track Record Matters
LPs underwrite the GP, not just the strategy. A demonstrated history of returning capital at top-quartile IRR and MOIC is the single strongest predictor of a successful fundraise. Emerging managers without that history face a steeper climb and often rely on capital introduction services or placement agents to reach allocators.
Frequently Asked Questions
How do private equity funds make money?
PE funds generate returns by acquiring companies, improving their operations or financial structure, and selling them at a higher valuation. The fund manager (GP) earns a management fee (typically 2% of committed capital) and carried interest (typically 20% of profits above a hurdle rate). LPs receive the remaining distributions.
What is the minimum investment for private equity?
Institutional PE funds typically require minimum commitments of $5 million to $25 million per LP. Some funds accept $1 million minimums for smaller institutions or family offices. Feeder funds and fund-of-funds structures can bring minimums down to $250,000 or lower, though they add a second layer of fees.
How long does a private equity fund last?
A standard PE fund has a 10-year term with provisions for one or two one-year extensions. The first three to five years are the investment period, during which the GP deploys capital. The remaining years are the harvest period, where portfolio companies are managed toward exit. Some complex situations push total fund life to 12 or 13 years.
