What Is Private Equity and How Does It Work for High-Net-Worth Investors?
By Georgia Holmes
Discover how high-net-worth investors can access private equity, how funds operate, what fees and restrictions to expect, and how private markets may fit into a diversified portfolio.
Private equity is an investment in businesses that are not publicly traded on a stock exchange, or in some cases in companies that are taken private. For high-net-worth investors, it can provide access to businesses, growth opportunities and investment strategies that may not be available through traditional listed share portfolios.
However, private equity works differently from investing in shares or funds that can be bought and sold on a public market. Investors may need to commit substantial sums, leave their money invested for many years and accept greater uncertainty about valuations and when returns will be received.
Understanding how private equity funds operate, what they charge and the risks involved can help you decide whether private markets have a place in your wider investment strategy.
What is private equity?
Private equity involves investing in privately owned businesses with the aim of increasing their value over time. A private equity firm typically raises money from investors, uses it to acquire stakes in businesses and works to improve their performance before eventually selling those investments.
The strategy can involve buying established companies, providing capital to businesses looking to expand or investing in companies undergoing significant change. Private equity managers may work closely with company leadership to improve operations, develop new markets, strengthen finances or support acquisitions.
Returns generally depend on the value realised when the investment is sold, after accounting for costs, fees and any borrowing used. There is no guarantee that a business will grow in value or that the manager will be able to sell it at an attractive price.
Private equity is one part of the wider private markets landscape. Other private market investments, such as private credit and private infrastructure, have different characteristics and should not be treated as interchangeable with private equity.
How do private equity funds work?
Many investors access private equity through a pooled fund rather than buying shares in individual private companies themselves.
A typical fund has two main parties:
The general partner (GP) or fund manager, which makes investment decisions and manages the fund.
The limited partners (LPs), who commit capital to the fund and generally have a more limited role in its day-to-day management.
Investors often agree to commit a specified amount rather than paying the entire sum at the outset. The manager then requests portions of that commitment over time as investments are made or fund expenses arise. These requests are known as capital calls.
The fund invests in a portfolio of businesses, works with them over a number of years and eventually seeks to realise the investments. This may involve selling a business to another company, selling to another private equity firm or listing it on a stock exchange.
When proceeds are received, the fund distributes them according to its terms. The amount and timing of distributions are uncertain, and investors may wait several years before receiving significant cash back.
A fund may have a life of around ten years or longer, sometimes with extensions. The actual investment period and…