What is private equity?

The best-known strategy is the buyout, in which a fund takes a majority or controlling stake, often with borrowed money; growth equity takes minority stakes in companies that are already growing, and venture capital is usually counted as a branch of private equity. A fund turns its holdings into cash by selling a company to another buyer or fund, listing it on a stock market, or paying cash out through a recapitalization.

Say a fund buys a company for $100 million, $50 million of it borrowed, and grows its profits for five years. If it sells the company for $160 million and repays the $50 million loan, its $50 million has become $110 million. Simple example. Terms vary by fund.

A fund ties up investors’ money for years and returns it as companies are sold, so how and when it exits matters as much as what it buys.

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