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Understanding Private Equity: An Overview
Private equity (PE) refers to investments made into private companies, typically through pooled funds, with the aim of enhancing their value and achieving substantial returns when sold or taken public. Unlike public equity, these investments are not traded on stock exchanges.
Structure of Private Equity Firms
Private equity firms are composed of limited partners (LPs), who provide the funds, and general partners (GPs), who manage the funds.
· GPs: These are the folks steering the ship. They scout for promising investments, roll up their sleeves to improve businesses, and decide when to cash out. Their earnings include management fees and a slice of the profits, often dubbed “carried interest.”
· LPs: The silent financiers, such as pension funds, endowments, sovereign wealth funds, high-net-worth individuals, etc. who put up most of the cash but leave the heavy lifting to the GPs.
Typical Lifecycle of a Private Equity Fund
1. Fundraising (Years 0–2)
This is the prelude, where general partners (GPs) market their fund to attract capital from limited partners (LPs).
