What is Private Equity? Examples & How to Invest

What does Private Equity really mean? You might have heard about it anywhere. In a nutshell, private equity involves investing in companies not listed on public stock exchanges.

You can think of it as a way to own a piece of a business—often to improve its operations, grow its value, and sell it later for a profit.

Unlike buying stocks on a public market, private equity deals happen behind closed doors. Exclusive. Strategic. High-stakes.

This article will walk you through the nitty-gritty of private equity, provide real-world examples, and explain how you can get involved. Let’s dive into the article.

Private Equity: Explanation

It refers to investments made in private companies or public companies that have been taken private. These investments come from private equity firms, which pool money from investors.

It could be a wealthy individual, pension funds, or endowments—to buy, manage, and eventually sell businesses.

The goal? Boost the company’s value over time and sell it for a profit. Rinse and repeat.

So why is it private? These deals don’t involve public markets, stock tickers, and daily price swings.

Instead, private equity focuses on long-term growth, often over 5-10 years. Firms take an active role—restructuring operations, streamlining costs, or scaling new markets. It’s hands-on. Not just a passive stock purchase.

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How Does Private Equity Work?

A private equity firm raises a fund from investors called limited partners (LPs). The firm, led by general partners (GPs), uses this capital to buy companies.

They might acquire a struggling business to turn it around or invest in a promising startup to fuel growth. Either way, the firm gets involved—replacing management, cutting costs, or expanding product lines.

After a few years, the firm exits. How? By selling the company to another firm, taking it public via an IPO, or merging it with another business.

The profits get split: most go to the LPs, while the GPs take a cut (typically 20%, known as carried interest).

Why Private Equity Matters

Private equity plays a big role in the economy as it funds innovation, creates jobs, and revives struggling businesses.

But it’s not without risks; high returns come with high stakes—illiquidity, long holding periods, and no guaranteed wins. Still, for those with capital and patience, it’s a compelling option.

Examples

To grasp private equity, look at real-world cases. These examples show how firms operate—and the impact they have.

• Kohl’s Department Stores (2005): Private equity firms Vornado Realty Trust and Cerberus Capital Management bought Kohl’s, a retail chain, for $11.5 billion. They streamlined operations, improved inventory management, and expanded e-commerce. By 2011, Kohl’s was thriving, and the firms sold their stakes for a tidy profit.
• Dell Technologies (2013): Michael Dell, alongside Silver Lake Partners, took Dell private in a $24.4 billion deal. Why? To restructure away from public market pressures. They shifted focus to cloud computing and IT services. In 2018, Dell went public again, with its value soaring. Isn’t it a bold move?
• Airbnb (2020): Before going public, Airbnb received private equity funding from firms like Silver Lake and Sixth Street Partners. The capital helped Airbnb weather the pandemic, refine its platform, and prepare for its IPO.

These cases highlight the diversity of private equity. From retail to tech, firms target industries with growth potential or turnaround opportunities. Each deal is unique and has a tailored strategy.

How to Invest in Private Equity

Are you ready to invest? Private equity isn’t as simple as buying stocks. It’s exclusive. It’s often reserved for accredited investors or high-net-worth individuals (HNIs). But don’t worry, retail investors can invest too. Here’s how you can get started.

1. Direct Investment

The traditional route. You invest in a private equity fund as a limited partner. These funds require significant capital—often $250,000 or more.

You’ll need to be an accredited investor (net worth over $1 million, excluding your home, or income above $200,000 annually).

Steps to take:

• Research firms: Look for reputable firms like Blackstone, KKR, or Carlyle Group. Check their track record.
• Understand the terms: Your funds may have a lock-in period of 7-10 years. Expect fees—typically 2% management fees and 20% carried interest.
• Diversify: Spread investments across multiple funds to reduce risk.

It is not for everyone because of its high barriers and long commitments. But the potential for outsized returns draws many in.

2. Private Equity ETFs or Mutual Funds

Don’t have millions to spare? No problem. Exchange-traded funds (ETFs) and mutual funds offer access to private equity-like investments.

These funds invest in publicly traded companies tied to private equity, like firms or their portfolio companies.

Examples:

• Invesco Global Listed Private Equity ETF (PSP): Tracks companies involved in private equity.
• ProShares Global Listed Private Equity ETF (PEX): Another option for diversified exposure.

What are the perks? Liquidity and lower minimums. But the downside is less direct exposure to private equity deals. However, it’s still a solid entry point.

3. Crowdfunding Platforms

Thanks to technology, private equity is more accessible. Platforms like EquityZen or SeedInvest let you invest in private companies with lower minimums—sometimes $10,000.

These platforms connect you with startups or late-stage companies seeking capital.

What to know:

• High risk: Startups can fail. Due diligence is critical.
• Illiquidity: Your money may be locked in for years.
• Research the platform: Ensure it’s reputable and regulated.

It’s a newer option. It might sound exciting but risky. But perfect for those who’re eager to back innovative companies.

4. Co-Investing with Firms

Some private equity firms allow investors to co-invest in specific deals alongside their funds. This skips the fund’s fees but requires deep pockets and connections.

You’ll need to network with firms or join investment groups to access these opportunities.

5. Business Development Companies (BDCs)

BDCs are publicly traded companies that invest in private businesses. They’re like private equity funds but more accessible. You can buy shares through a brokerage account.

Examples:

• Ares Capital Corporation (ARCC): Invests in mid-sized businesses.
• Main Street Capital (MAIN): Focuses on lower-middle-market companies.

BDCs offer dividends and liquidity, but they carry risks tied to the underlying businesses. So you must research carefully.

Things To Consider Before Investing

Private equity isn’t a quick win. Before jumping in, weigh these factors:

• Illiquidity: Your money could be locked up for a decade. Can you afford to wait?
• Risk: Not every deal succeeds. Diversification helps, but losses happen.
• Fees: Management fees and carried interest eat into returns. Understand the cost structure.
• Due diligence: Research the firm, its strategy, and its track record. Past performance matters.
• Tax implications: Private equity gains may face complex federal tax laws. You can consult a tax advisor.

If you’re patient, Private equity could be the best fit. And if you’re uncertain about putting your funds in such firms, you can opt for liquid investments like stocks or ETFs.

FAQs

Wrapping Up

Private equity offers a unique way to invest in businesses. However, with high potential, there is a high risk too.

From turnarounds like Kohl’s to tech giants like Dell, private equity shapes industries and drives growth.

For investors, it’s a chance to back companies directly—whether through funds, ETFs, or crowdfunding.

If you’re interested, you can start small by researching thoroughly and considering your risk tolerance. If we sum up, Private equity isn’t for everyone, but for those with capital and patience, it’s a powerful tool.