“Private equity” (PE) is a generic term describing a few related but different approaches to investing in either private companies or publicly traded companies that subsequently “go private” as a result of a private equity transaction. That’s what “private” means in “private equity”: privately owned and traded stakes in companies that are not subject to public market scrutiny and generally free from federal securities regulation.
PE includes a variety a fund types, including leveraged buyout firms, growth equity firms, and venture capital firms. The differences between these fund types relates primarily to (a) the stage of the company the fund invests in (e.g., early vs. late stage) and (b) the methods used to finance the investment.
PE funds are managed by a General Partner (GP) – which is typically controlled by profit-sharing partners of the firm – and funded by entities called Limited Partners (LPs). LPs are typically other large institutional investment funds like state pension plans, university endowments, pooled retirement funds, insurance companies, and wealthy individuals.
Generally, the GP will put up some of its own cash to finance each investment; it will also arrange bank loans and other debt instruments from banks and other lenders to finance a large part of the transaction; and it will “call capital” from LPs to fund the remaining portion, usually a minority, of the investment. However, the GP’s and LP’s stakes combined constitute the equity in the investment, which is why they control the board, governance, and operations of the newly acquired company.
Assets under management (AuM) at PE funds can range from the tiny (just a few or tens of millions of dollars — which are likely to be family offices of wealthy individuals) to the mega-sized (which can exceed $50 billion total AuM). How much AuM a fund has is largely a function of the reputation of the firm’s partners, the strength of their investment track record and past returns, and the types of deals being done (venture capital funds investing in growth companies typically have less AuM than mega-cap leveraged buyout funds doing $20 billion dollar deals in a single transaction).
Be sure to check out our PDF guide “How to Nail Your Private Equity Interview (whether you have finance training or not)” for in-depth tips and strategies on how to successfully interview for jobs at top private equity firms!
Also be sure to check out our step-by-step Private Equity LBO Modeling Training Videos for walk-through tutorials on how to build an LBO model, navigate Excel with ruthless efficiency, and rapidly create an LBO PowerPoint deck to present to your PE interviewers.