Private Equity
Private equity is investing in privately held companies (or taking public companies private) to drive value creation and realize returns through exits.
Allocator relevance: A major allocator sleeve where manager selection, fee drag, and operational execution drive net outcomes and risk.
Expanded Definition
Private equity typically involves acquiring meaningful ownership, influencing strategy, and executing value creation (operational improvements, growth, M&A, financial structuring). Returns come from earnings growth, multiple expansion, and deleveraging, but risks include leverage, cyclicality, and exit timing. PE strategies vary: buyout, growth, sector-focused, and special situations.
Allocators evaluate PE managers on sourcing edge, underwriting standards, operating capability, leverage discipline, and track record consistency across cycles.
How It Works in Practice
Funds raise commitments, call capital during the investment period, acquire portfolio companies, execute value creation plans, and exit via sale, IPO, or recapitalization. LPs monitor via reporting packages, DPI/TVPI, and governance channels (LPAC).
Decision Authority and Governance
Governance includes leverage limits, conflicts management, valuation policy, and approval rights for key actions (extensions, key person events). Strong governance matters because PE is opaque and long-duration.
Common Misconceptions
- PE returns are mainly financial engineering.
- Bigger funds always mean better outcomes.
- Reported NAV reflects true market value at all times.
Key Takeaways
- Execution and operating capability matter as much as deal pricing.
- Leverage discipline drives downside outcomes.
- Net returns depend heavily on fees, carry, and timing.