Investing Talk #4: Private equity investing
Private equity investing is about investing in private companies (those not listed on stock markets) or buying out public companies to take them private. It’s a strategy used by institutional investors, wealthy individuals, and private equity (PE) firms to generate high returns — but it comes with higher risk, illiquidity, and longer time horizons.
What Is Private Equity (PE)?
Private equity is capital invested directly into private businesses. This includes:
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Venture capital (startups and early-stage companies)
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Growth equity (expanding companies)
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Buyouts (taking control of mature businesses)
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Distressed investments (turnaround of troubled companies)
How Private Equity Investing Works
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Raise Capital: PE firms raise money from institutional and accredited investors into a private equity fund.
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Invest Capital: The fund invests in private companies — through buyouts, equity stakes, or funding growth.
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Add Value: The firm may restructure operations, improve profitability, or expand the business.
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Exit: After 4–7 years, they exit via a sale, IPO, or merger, aiming to return profits to investors.
Private Equity Investment Types
| Type | Description | Risk / Reward |
|---|---|---|
| Venture Capital | Early-stage startups | High risk / High reward |
| Growth Equity | Capital for expanding private businesses | Medium risk |
| Buyouts (LBOs) | Acquiring mature companies using debt | Medium–High risk |
| Distressed Assets | Investing in failing companies to turn them around | Very high risk |
| Fund of Funds | Indirect investment across many PE funds | Lower risk via diversification |
Pros of Private Equity
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High return potential (often 15–25% IRR for successful funds)
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Hands-on value creation
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Less affected by public market volatility
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Access to non-public, high-growth companies
Cons of Private Equity
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Illiquidity: Funds are locked up for 7–10 years
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High minimums: Often $250,000+ to invest
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Complex structure: Fees, taxes, and legal terms can be confusing
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Long holding period before seeing returns
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High risk of loss, especially with early-stage investments
Who Can Invest?
| Investor Type | Access Options |
|---|---|
| Accredited Investors | Directly in PE funds or syndicates |
| Institutional Investors | Pension funds, endowments, insurers |
| Retail Investors | Indirectly via PE ETFs, listed BDCs, or secondaries (limited exposure) |
Common PE Investment Strategy Example
Leveraged Buyout (LBO):
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Borrow funds to buy a mature company
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Improve cash flow, reduce costs, grow earnings
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Sell in 5–7 years for profit
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Use leverage to boost returns
PE vs Public Market Investing
| Feature | Private Equity | Public Markets |
|---|---|---|
| Liquidity | Very low (locked up) | High (daily trading) |
| Return Target | 15–25%+ | 6–10% average |
| Risk | High | Moderate |
| Time Horizon | Long (5–10 years) | Flexible |
| Access | Restricted | Open to all |
Private equity can be a powerful wealth-building tool if you:
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Have a long-term horizon
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Are accredited (or use fund-of-funds or BDCs for access)
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Understand the risks, fees, and illiquidity