Private Equity Primer: Definition, Examples, Strategy, & Top Firms

A comprehensive guide to the private equity industry and its top firms
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By Mike Hinckley
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    The private equity industry is the source of much intrigue and mystery.

    Many young professionals would kill to join the industry, due to its high pay, and yet many are confused about what it is and how it works.

    That’s why I put together this brief primer. It’s exactly the walkthrough I wish I had when I starting my career.

    Below I cover private equity from all angles — the definition, the business model, the history of the industry, the various investment strategies, and all the top firms.

    Let’s get started!

    What Does Private Equity Do?

    Private equity funds purchase companies to earn a return, usually via a leveraged buyout. This means that the private equity firm uses high amounts of debt to finance the purchase of the company (usually 50-70% of the total purchase price).

    Usually, private equity funds purchase majority (or controlling) stakes in companies, so they can own and control them outright. In addition to earning returns from de-leveraging, private equity firms typically also seek to improve the companies they purchase through more efficient operations and cost cutting efforts.

    After a certain period of time (usually ~5-7 years), the private equity firm will seek to sell their investment to capture the return. They measure their annual return using metrics like internal rate of return (IRR) or multiple on money (MoM).

    Private Equity Fund Structure

    Private equity funds invest capital on behalf of their “limited partners” (LPs). These LPs are typically foundations, non-profits, pension funds, or wealthy family offices.

    The LPs commit capital to the private equity fund for a set period of time (usually 7-10 years), and they entrust the private equity firm’s investors (called “General Partners”) to deploy their capital into profitable investments.

    If you’d like to go deeper, check out my deep dive on how private equity funds are structured, including entity structure.

    How Does Private Equity Make Money?

    Private equity funds make money by charging fees to their Limited Partners, on behalf of whom they are investing funds.

    Private equity firms typically charge two kinds of fees:

    • Management fees – this is a percentage fee (usually 2%) that is assessed on the total capital under management; these fees typically support the fund’s ongoing operations (e.g. office expenses, staff salaries, etc.)
    • Carried interest fees – this fee is assessed as a percentage of the total profits earned on the investments the firm makes (usually 20%); typically, this fee is charged once the firm clears a certain threshold level of return. When performance is strong and the fund has had large returns on a big fund, these fees can be quite large (e.g. 20% of a $1 billion gain is $200 million)

    Private Equity History

    Private equity firms first rose to modern prominence during the 1980s during the period of so-called “corporate raiders.” During this period, private equity firms purchased several companies, including many public companies, and took them private.

    There were several examples of deals that had high publicity, such as KKR’s acquisition of Nabisco (chronicled in the famous private equity book called Barbarians At The Gate).

    However, the history of private equity actually goes back much farther. In fact, there are indications that the first “leveraged buyout” could be considered to have taken place as early as 1901 when JP Morgan purchased Carnegie Steel Corp for $480 million.

    Private Equity Strategies

    While many associate private equity with “buyout” investing and specifically with “leveraged buyout” transactions, private equity can also generically refer to all private investing firms.

    Using this broader definition, there are actually several types of investment strategies within private equity. Here are the main ones:

    • Buyout – firms purchase companies outright, usually using high amounts of debt; typically, firms earn returns from paying down debt and from improving the operations of the company in this style of investing
    • Restructuring – firms purchase companies that are in financial distress and potentially in the formal bankruptcy process; typically, firms target companies whose core business has value but has taken on too much debt and would benefit from new ownership and capital structure
    • Venture capital – firms invest capital in early stage companies that are growing quickly and have high potential; unlike other forms of private equity, in this style of investing company targets have relatively low operating history and investments are made on the basis of other factors (e.g. market potential, growth rates, and capability of management)
    • Growth equity – firms purchase minority stakes in fast growing businesses (usually pre-IPO); unlike other forms of private equity, the typical way of earning returns in growth equity is through growing revenue and profitability

    Private Equity vs. Venture Capital

    In today’s parlance, “private equity” has become synonymous with buyout investing. In this sense, the private equity style of investing is quite different from venture capital.

    In private equity, firms target companies that are mature, have strong and predictable margins and cash flow, can support large debt loads, and have established track records.

    This is quite different from venture capital investing, which typically focuses on investing in early stage companies who have little track record, negative profitability, but high growth potential.

    To go deeper on this distinction, as well as careers in each area, check out my article on the key differences between private equity and venture capital.

    Private Equity vs. Growth Equity

    Typical private equity investing focuses on buyout investing, where firms take controlling stakes in mature firms with strong and stable cash flows.

    There’s also a form of private equity investing that focuses on fast-growing companies called “growth equity.” In this growth-focused style, firms target companies that have high growth, are pre-IPO, and are at or approaching profitability.

    Growth funds typically acquire a minority stake, whereas buyout funds acquire a controlling or majority stake.

    For more, check out my article on key similarities and differences between private equity and growth equity — including in terms of career opportunities.

    Types of Private Equity Firms

    As discussed above, there are many strategies of private equity investing. However, there are also several types of firms within the industry.

    These different types of firms also have slight nuances in their strategy. I profile each in the sections below:

    • Mega funds
    • Publicly traded funds
    • Middle market funds
    • Technology private equity

    Mega Funds

    Mega funds are the largest private equity funds in the industry. Most mega funds are relatively older firms with long and successful track records of buyout investing.

    These firms typically have the largest fund sizes, are considered to be the most prestigious firms to work at, and have the highest compensation for employees.

    Many of these funds are based in New York City or San Francisco; however, one hallmark of mega funds is that they’ve expanded quickly in recent years to have offices all over the world. Also, while many of these funds started by focusing on buyout investing, they’ve since expanded into other areas, launching funds that are dedicated to growth equity to venture capital to credit investing.

    Prominent mega funds include:

    • Blackstone Group
    • Carlyle Group
    • Apollo Global Management

    If you’d like to go deeper, check out my article on mega funds here.

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    Publicly Traded Private Equity Firms

    In recent years, many of the largest and most successful private equity firms have gone public via IPOs.

    This has allowed the partners of these firms to cash out substantial amounts, while also providing the firms with a permanent capital base from which to expand into other areas of asset management.

    In practice, the aforementioned mega funds have led the way in this area, and there is near 100% overlap between mega funds and publicly traded private equity firms.

    To read more, check out my complete list of the publicly traded private equity firms.

    Private Equity Middle Market Firms

    Private equity firms that are smaller than mega funds are sometimes referred to as “middle market” private equity firms.

    There’s no exact criteria for what constitutes “middle market,” but many would agree that a firm is middle market when they invest in deals that are valued below $5oo million.

    Since this designation still leaves a broad category of firms, some draw distinctions between “upper middle market” (deals valued between $500 million and $1 billion) and “lower middle market” firms (deals valued between $10 million and 100 million).

    While they typically do not pay as richly as mega funds, middle market firms still provide amazing career opportunities and very attractive pay. Comparing to mega funds, there are several pros and cons associated with middle market firms.

    Top middle market firms include:

    • JMI Equity
    • Alpine Investors
    • Court Square

    To go deeper, check out my deep dive into the middle market of private equity.

    Technology Private Equity Firms

    Many private equity firms choose to specialize in certain industries (e.g. healthcare, industrials, etc.).

    However, in recent years, there have been several private equity firms that have specialized in technology and software investing. Usually, these industry areas are more commonly associated with growth-focused strategies, rather than buyout.

    However, given the positive business model characteristics and the attractive opportunities, certain funds have brought a specialized approach to this areas.

    Top software and technology private equity firms include:

    • Silver Lake
    • Vista Equity
    • Hellman & Friedman

    To read more, check out my complete list of the top technology and software private equity funds here.

    Growth Private Equity Firms

    Some private equity firms have elected to focus on investments where they earn their return primarily from acquiring minority stakes in fast growing companies.

    This contrasts the usual targeting criteria for private equity firms — which focuses on slow growth companies with strong cash flow and an ability to support high debt burdens.

    As discussed above, this form of private equity investing is popularly now known as “growth equity.”

    Top firms in this area include:

    • General Atlantic
    • TA Associates
    • Summit Partners

    Go here for my deep dive on top growth equity firms.

    Next Steps

    Private equity is one of the most lucrative but also most competitive career paths to embark upon. Check out my full guide on how to break into private equity.


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