Resources & ToolsPrivate Equity 101

Private Equity Explained

What is Private Equity?

  • A source of capital for companies in need
  • A key driver in innovation, economic growth and sustainability
  • A job creator and supporter of thousands of companies (and the jobs they provide) across America
  • A source of wealth creation that supports retirements of teachers, firefighters, police, other civil servants as well as helping to fund education, medical research, and the arts
  • A reliable source of income for its investor

Why Private Equity?

Understanding private equity

  • Long-term capital usually locked up for 10+ years
  • Invested through a negotiated process
  • Majority of investments are in unquoted companies
  • Typically entails a transformational, valued-added, active strategy

Drivers of enhanced performance in private markets

  • Alignment of incentives between managers and owners
  • Active participation in strategy, management and operations
  • Less short-term pressure on performance

Reasons for investing in private equity

  • Improve the risk/reward characteristics of a portfolio
  • Compensated for illiquidity and market inefficiency
  • Active company management without the constraints of the public market
  • Private companies constitute a large portion of the overall market not addressed through other asset classes in an institutional portfolio

Who are Limited Partners?

  • LPs are the investors into private equity funds which are managed by a General Partner (GP)
  • Like shareholders in a corporation, LPs have limited liability to the extent of their investment and have no management authority
  • LPs invest to achieve returns in the context of their institutional portfolio which may include other traditional investments like stocks and bonds
  • To be an LP you must be a legally defined qualified investor, a class which includes public pensions, endowments, insurance companies, etc.