Private equity funds are investment vehicles that raise capital from limited partners—typically large institutions like pension funds, insurance companies, and endowments—to invest in a variety of assets, including buyouts of public companies and investments in private companies. The fund’s general partner, typically a private equity firm, invests the capital and manages the portfolio on behalf of the limited partners. Private equity firms typically charge a management fee of 2% of the fund’s assets and 20% of the profits generated by the fund.
Private equity funds have been around for centuries, but they gained prominence in the 1980s with the advent of leveraged buyouts (LBOs). In an LBO, a private equity firm buys a public company using a combination of debt and equity. The firm then restructures the company to improve its profitability and sells it after a few years for a profit.
LBOs became popular in the 1980s because they allowed private equity firms to generate high returns for their investors. However, they also became controversial because they often involved large amounts of debt, which put the companies at risk if they failed to perform as expected. In recent years,private equity firms have been moving away from LBOs and instead investing in more stable companies with strong cash flow.
Private equity investing is often illiquid, meaning that investors may not be able to access their money for several years. This is because private equity firms typically have a “lock-up” period of five to seven years, during which time they cannot sell their investments. For this reason, private equity investing is only suitable for investors with a long-term time horizon.