Private Equity

Section: Private Equity Estimated study time: 45 minutes Content: Private equity (PE) encompasses investments in companies that are not publicly traded, made through privately negotiated transactions. The primary categories are venture capital (VC), leveraged buyouts (LBOs), growth equity, and distressed investing. The PE fund structure is typically a limited partnership: the general partner (GP) is the PE firm managing the investments, while limited partners (LPs) are institutional investors (pension funds, endowments, sovereign wealth funds) and high-net-worth individuals who provide the capital. The GP charges a management fee (typically 1.5-2% of committed capital) and a carried interest (typically 20% of profits above a preferred return). Carried interest is the GP's share of investment profits — the primary performance incentive structure in private equity. Venture capital funds invest in early-stage companies with high growth potential but also high failure risk. The typical VC portfolio follows a "power law" distribution: most investments fail or return modest amounts, but a few investments generate outsized returns (10x, 50x, or more) that drive the entire fund's performance. VC firms provide not just capital but also strategic guidance, network access, and operational support to portfolio companies. Investment stages include: seed (pre-product, pre-revenue), early stage (product exists, testing market), expansion stage (growing revenues, path to profitability), and late stage (profitable, approaching IPO or acquisition). Valuation is extremely difficult for early-stage companies without revenues; analysts use techniques like the venture capital method, which works backward from an expected exit valuation. Leveraged buyouts (LBOs) acquire established, cash-flow-generating businesses using a combination of equity (20-40%) and substantial debt (60-80%). The debt is secured by the target company's assets and cash flows — the "leveraged" in LBO. The financial engineering of…