How Private Equity Works 

PE funds generally follow a multi-stage lifecycle:  

1. Fundraising – Raising capital commitments from investors, usually without drawing capital immediately.
   
2. Investment Period – Identifying and investing in target companies. Investors typically receive a capital call; however, capital calls can occur throughout the life of the fund.
3. Harvesting – The fund manager begins to monetize the portfolio investments, and investors begin to receive distributions.
4. Wind Down and Final Distribution – The fund manager makes a final distribution to investors and closes the fund. 

 

Common Private Equity Strategies 

Many fund managers specialize in a specific strategy and stage of a company’s development. These strategies include but are not limited to. 

Strategy	What It Means
Venture Capital	Early-stage, high-risk/high-reward funding
Growth Equity	Investments in profitable companies that are scaling operations. Investments are often minority stakes
Buyouts	Acquiring controlling stakes in more mature companies, often using a mix of debt and equity with the goal of operational improvement

 

Benefits of Private Equity 

• Outperformance Potential: PE funds are designed to provide the potential for higher returns relative to other, more liquid asset classes.  

• Access to More Companies: PE offers exposure to a broader universe of private firms not available publicly.  

• Long-Term Value Creation: PE managers actively work with portfolio companies to drive improvements by taking a long-term view.  
• Diversification: PE often behaves differently than public equities and bonds, enhancing portfolio balance. 
  

 

Implementation Insight: PE can serve as a long-term growth enhancer for investors seeking to access the private markets. 

 

Key Risk Considerations 

• Manager Selection: Performance varies widely. Choosing top-tier managers matters.  

• Liquidity: PE investments are longer-term, less liquid investments—investors’ capital is locked up for seven to 10 years.  

• Transparency: PE funds may not offer the same level of transparency as public investments. 

• Fees: Costs typically include an annual management fee (1–2%) and performance fees known as carried interest (10–20% of value appreciation or aggregated profits).  

• Leverage & Concentration: Use of debt can magnify losses as well as gains, and concentrated portfolios can increase risk. 

 

Implementation Insight: Thorough due diligence on PE managers is essential, as performance can vary widely. Investors should also consider long-term liquidity needs and time horizons. 

 

Private Equity: Myth vs. Fact 

Myth	Fact
PE is only for big institutions	New structures are making PE more accessible to high-net-worth investors.
PE just means buying and flipping companies	PE firms often work closely with management to improve and grow businesses.
PE always uses too much debt	While debt is common in buyouts, some strategies use little or no leverage.
It’s too risky and opaque	Top-tier managers use rigorous due diligence and governance to manage risk.

 

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