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With trillions of dollars under management, Private Equity (“PE”) is a term you have likely encountered, yet its inner workings might seem cloaked in complexity. This series of educational guides is designed to unravel the intricacies of PE, offering a comprehensive overview that covers the what, who and how to give you a clearer understanding of the world of PE. 

What Is Private Equity?  

At its core, PE refers to a form of capital investment made into private companies, or the acquisition of public companies with the intent of taking them private. Unlike the stocks of publicly traded companies that anyone can buy or sell on open stock exchanges, PE investments are not publicly listed. The goal of PE is straightforward: to invest capital into a company, nurture and grow it, and eventually exit with a profit, thus generating a significant return on the investment. 

One example of a PE success story was the acquisition and eventual sale of fashion retailer Hugo Boss, by Permira, a PE firm. Permira saw the fashion house's potential and transitioned it from a wholesale model to a predominantly retail-focused brand. Under their ownership, Hugo Boss's global footprint expanded, especially in Asia, increasing the number of its own retail stores threefold, which significantly bolstered profit margins. Sales soared by 60%, EBITDA more than doubled, and the share price hit record highs. Permira’s strategic guidance cultivated Hugo Boss into one of the top global fashion brands, culminating in a successful exit in 2015 that made Permira about twice its original investment after seven transformative years. 

Where Does Private Equity Fit In The Range Of Asset Classes?  

PE holds a unique place in the investment landscape, distinctly set apart from traditional asset classes. Traditional assets, forming the bedrock of most investment portfolios, include well-established options like equities, bonds and cash. These are known for their liquidity, historical performance data and regulatory oversight. 

On the other hand, alternative asset classes encompass a range of investments that diverge from these conventional options. PE falls under this category, offering investors a different path to potentially augment growth and hedge against market volatility. Unlike traditional assets, alternative investments like PE often require specialised knowledge and come with a different risk-reward profile. They are sought for their potential to diversify portfolios and their typically lower correlation with standard market movements.  

Who Invests In Private Equity?  

PE investing is traditionally dominated by institutional investors, which includes banks, sovereign wealth funds, pension funds, university endowments, and insurance companies. Family offices have also increased their investments into PE. These groups of investors are typically characterised by a high degree of financial sophistication, with the necessary resources and expertise to commit to the longer investment horizons that PE requires, distinguishing it from the more liquid public markets. Increasingly, however, recent trends have started to open avenues for retail investors to participate in PE, democratising access to this asset class. 

How Does One Access Private Equity Investment Opportunities?  

Accessing PE investment opportunities has traditionally been limited to institutions and high-net-worth individuals due to the exclusivity of most PE funds. However, the landscape is evolving with the introduction of innovative financial platforms and products that make PE more accessible to a wider audience. New avenues include fund of funds, which aggregate investments from various individuals to participate in PE funds, and publicly traded PE firms such as Blackstone (NYSE: BX) and Apollo Global Management (NYSE: APO). Additionally, digital platforms are now offering access to PE with lower minimum investments for accredited investors. Despite the emergence of these opportunities, it's important for potential investors to fully grasp the unique risks of PE to make well-informed investment decisions.  

Read the next article to find out why investors have sought out PE.

In the diverse landscape of the investment assets, Private Equity (“PE”) stands out as a distinct and compelling avenue for those looking to diversify their portfolios and potentially achieve higher returns. 

But what exactly is PE?

Definition Of Private Equity

PE is a form of investment where investors directly invest in private companies or buy out public companies to take them private. Unlike publicly traded stocks, PE investments are not listed on stock exchanges.

For a comprehensive understanding, explore the first article of our PE deep dive series to kickstart your educational journey into the world of PE.

Private Equity Industry Overview

The PE industry has experienced rapid growth over recent years, expanding its influence across global markets. This surge is driven by increasing investor interest, attracted by the potential for higher returns and the industry’s ability to drive transformation in portfolio companies. In particular, PE buyout funds have consistently outperformed public markets over various investment periods, as evidenced by the higher pooled net Internal Rate of Return ("IRR") across 5-, 10-, and 20- year periods when compared to the MSCI World Public Market Equivalent ("PME") as of Q3 2023. PE now commands a significant portion of the investment landscape, playing a pivotal role in shaping business growth and innovation worldwide.

• PE industry’s assets under management (AUM) has enjoyed significant growth of approximately 12.7% per annum since 2000¹ 
• Since 2000, U.S.-focused PE Funds have represented at least half of global PE AUM¹ and is widely considered the largest and most developed market for PE Fund investing

¹Preqin, March 2024

How Private Equity Works

The PE process involves identifying potential investment opportunities, acquiring stakes in companies, actively managing these investments to enhance their value, and finally, exiting these investments through a sale or IPO to realise a profit.

To learn more, check out our in-depth guide to the PE Lifecycle.

Types Of Private Equity Investments

To learn more about each strategy, read our in-depth guide to Types of Private Equity Strategies.

Key Players In Private Equity

Key players in PE include General Partners ("GPs") who manage the PE funds, Limited Partners ("LPs") who invest in these funds, and portfolio companies that are the investment targets. The relationship between General Partners and Limited Partners, shaped by economic incentives and legal agreements, underscores the essence of these funds.

Deep dive into the PE ecosystem in our guide to PE Fund Structures, Economics, and Stakeholders.

Benefits And Risks Of Private Equity

PE offers several benefits, including the potential for higher returns, which are potentially higher than public markets. This is partly due to PE firms' active management strategies and their ability to tap into exclusive opportunities that are not accessible in public markets. Furthermore, PE serves as a good tool for portfolio diversification. Its performance is not directly correlated with the fluctuations of the stock market, and it spans a diverse range of sectors and industries. 

On the flip side, PE investments come with their own set of risks. Investing in PE can be unpredictable in terms of cash flow and requires firm commitments, with penalties for not meeting these commitments. Another risk is their illiquid nature, meaning that these assets cannot be quickly sold or converted into cash. Investors in PE face long lockup periods, during which their capital is tied up and inaccessible, presenting a significant long-term commitment.

Read about why investors turn to PE and the risks considerations of PE in our deep-dive articles.

Impact Of Private Equity

PE plays a significant role in the economy by investing in and growing businesses, which can lead to job creation and economic development. Additionally, an increasing focus on sustainability investing by PE firms is contributing to environmental stewardship and social responsibility, driving positive changes in business practices and innovations in green technologies. PE firms bring expertise and resources to companies, helping them innovate and expand.

Why Is It Easier To Access PE Today?

1. Growth of digital investment platforms has simplified the process of investing in PE and lowered the minimum investment thresholds for accredited investors.
2. Innovative PE products, such as PE bonds targeted at retail investors, offer a more efficient way for investors to invest in PE.
3. More educational resources about PE are available to investors today.