What is private equity?Medium

Buying whole companies with borrowed money, improving something, and selling in five years. There is no price on a screen at any point in between.

3 min read · 582 words

The short answer: a private equity firm raises money from institutions, uses it plus a large amount of borrowed money to buy whole companies, holds them for roughly three to seven years while trying to make them worth more, and sells them. The investors get their money back with a share of the gain; the firm keeps the rest.

The structure, which is unlike a fund you can buy

Money is committed, not paid. Investors promise an amount; it is drawn down in capital calls over years as deals happen. Your money is either at work or it is a promise — never idle in the fund.
The fee is on the commitment. Often on the whole committed amount rather than on what has been invested, for years. This is why early reported returns look poor even when everything is going as planned — the J-curve.
There is no exit. Your interest is locked for the fund's life, typically ten years. Selling it early means finding a buyer and the manager agreeing, which is the entire reason a secondaries market exists.
The firm shares the profit above a hurdle return, which is why the alignment argument for the structure is a real one.

Where the return actually comes from

Three sources, and honest practitioners separate them because they are not equally repeatable:

Leverage. Buy with borrowed money, repay debt out of the company's cash, and the equity slice grows even if the business is worth the same. This is arithmetic, not skill.
Multiple expansion. Sell at a higher multiple of earnings than you paid. Partly skill, largely the market on the day you sell.
Operational improvement. The company genuinely earns more. This is the only one that creates something, and the one that is hardest.

The leveraged buyout page walks the transaction through, and what an LBO is is the plain-language version.

Why "no daily price" is the real difference

A listed share is priced every second and the number moves whether or not anything happened. A private holding is valued periodically, under a policy, by the manager — so a portfolio of them can look calm through a quarter in which everything listed moved a great deal.

That calmness is not stability, and treating it as such is the commonest error in thinking about this asset class. Nothing about the underlying businesses became less exposed to the economy; only the measurement changed frequency.

Reading the returns honestly

Private equity reports an internal rate of return, which is sensitive to when money moved rather than only how much came back. Borrowing to delay a capital call raises the reported rate without changing what was earned. The companion number, a multiple of invested capital, ignores timing entirely — which is why serious reporting quotes both, and why quoting one alone is a choice. IRR and NPV is the page on the arithmetic.

The neighbours, which are different things

Venture capital — minority stakes in young companies, no leverage, a different risk shape entirely.
Private credit — lending to those companies rather than owning them.
Infrastructure and real assets — long-lived assets with contracted cash flows.

The private markets group lists every seat in this half of the industry.

The one sentence to take away

Private equity buys whole companies with borrowed money and sells them years later, so the three questions that matter are how much of the return was leverage, when the money actually moved, and what the exit depends on.