private equity

Private equity can be appealing for clients who want access to privately held companies and long-term growth. Access, however, is often limited to accredited and institutional investors.

In this article, you'll see how private equity funds are structured, who can invest, and the main strategies they use. Share it with clients as you assess whether private equity fits their goals and risk tolerance.

What is private equity?

Private equity (PE) involves taking ownership stakes in companies that are not traded on public stock exchanges. It usually means buying private businesses or taking public companies private, then selling them later at a profit. These investments lock up capital for years and are less liquid than public stocks, so they tend to carry higher risk.

Most investors gain exposure through private equity funds that pool money to buy portfolios of privately held companies. These portfolios can include younger firms and established businesses that choose to stay private instead of listing on an exchange.

For more in-depth coverage of private equity and other alternative investments, you can visit and bookmark our Alternatives News section.

How does private equity work?

Private equity funds raise capital from investors, then use that pool to buy stakes in private companies or take public companies private. The fund's managers work with those businesses over several years to grow their value, then seek to exit at a profit through a sale or IPO.

A typical fund has a finite life, often around 10 years, with distinct formation, investment, and exit periods. During that time, the manager calls committed capital as deals close, manages each portfolio company, and eventually returns cash to investors through distributions.

Fund structure

Most private equity funds are structured as limited partnerships, with a private equity firm managing the fund and investors providing committed capital. There are often three entities involved:

• general partner (GP): manages the fund's day‑to‑day operations, makes investment decisions, and oversees portfolio companies on behalf of investors
• limited partner (LP): commits capital to the fund, has limited liability, and relies on the general partner to deploy and manage investments
• target company: privately held or newly acquired business that receives capital in exchange for an ownership stake

Key features

Several structural features make private equity work differently from traditional public equity. These include:

• how deals are financed
• how long capital is tied up
• what the return profile looks like
• what level of manager involvement is required
• where the focus lies outside public markets

Here are some of the key characteristics of private equity that investment advisors and investors should take note of:

Leverage (debt)

Many private equity deals use debt to finance acquisitions, especially when buying entire public companies and taking them private. This leverage can increase gains when a turn‑around or growth plan succeeds, but it can also deepen losses if performance falls short.

Illiquidity and long-term horizon

Investors typically commit capital for 10 years or more, with limited options to exit early. Because there is no active secondary market for most fund interests, clients need to be comfortable locking up capital for the full fund term.

High potential return

Private equity aims to deliver returns above public markets to compensate for higher risk and illiquidity. Managers look for companies where operational changes, growth initiatives, or strategic repositioning can increase the exit value over the holding period.

Active management and value creation

Private equity managers are hands‑on owners who work closely with portfolio companies to drive change. They may push cost reductions, new technology, add‑on acquisitions, or new markets to support value creation before an exit.

Private companies

Private equity focuses on businesses that are not listed on public exchanges, or on public companies that are taken private as part of a deal. This opens access to a wide range of smaller, earlier‑stage, or private‑by‑choice firms that are not available through public stocks.

Who can invest

Access to private equity funds is usually restricted to accredited investors and large institutions. Minimum commitments are high, so most individual clients only participate if they already meet wealth or income thresholds. Here are a few examples of qualified PE investors:

• pension funds
• insurance companies
• university endowments
• other institutional investors
• high‑net‑worth and ultra‑high‑net‑worth individuals

If you want to find out which managers are growing in this market, you can check out our special report on the fastest‑growing investment management firms.

Private equity investment strategies

Private equity funds specialize in different strategies that shape risk, return, and client fit. Here are some of the most common approaches you will see in the market:

• venture capital: backs early‑stage companies with unproven models, using smaller minority stakes and expecting a few big winners to offset many failures
• growth equity: takes minority positions in later‑stage, faster‑growing companies that need capital to expand, commercialize products, or professionalize operations without giving up full control
• buyout: acquires controlling stakes in mature businesses, often using debt, then works to improve operations, governance, or capital structure before exiting through a sale or IPO
• secondary buyout: acquires companies already owned by another private equity sponsor, giving the seller an exit while pursuing a new growth, roll‑up, or repositioning plan
• distressed debt: buys or restructures the obligations of companies in financial distress or bankruptcy, targeting gains from turnarounds, restructurings, or negotiated recoveries
• private credit: provides loans and other credit solutions to private companies that need working capital or deal financing, offering an alternative to banks or public bond markets
• infrastructure: invests in long‑term assets such as transportation, energy, or digital networks, seeking relatively stable cash flows from projects that support core economic activity
• impact funds: invest where managers aim for financial returns alongside measurable social or environmental outcomes, often tied to specific themes or agreed impact metrics

These strategies give you different tools to address client objectives around growth, income, and diversification. For a closer look at how private equity investing fits into portfolios, check out this expert overview.

How to choose a private equity investment strategy

When selecting a private equity strategy for a client, start with fit, not product. Here are key factors to weigh before you narrow specific fund options:

Client profile and objectives

Begin with basic questions on growth, income, diversification, or some mix. Match those goals with risk tolerance, time horizon, and the client's comfort with illiquidity. Make sure any commitment still leaves enough liquid assets for near‑term needs.

Manager due diligence

Conduct careful research of the manager behind the strategy. Review their track record across cycles, the continuity of the investment team, and how they are paid. Check if fees and carry align their incentives with client outcomes.

Investment approach

Clarify whether the strategy focuses on buyouts, growth equity, venture capital, or another niche. Check sector and regional focus to see how exposures fit with the rest of the client's holdings. Ask how the manager plans to create value at the portfolio‑company level, not just source deals.

Fund and deal type

Understand the fund structure and cash‑flow pattern before you recommend anything. Drawdown funds call capital over time and return it through distributions, while some evergreen or interval vehicles handle subscriptions and redemptions differently. Compare minimums, fee terms, and how the strategy has deployed capital in earlier fund cycles.

Fiduciary duty

Test every potential allocation against your duty to act in the client's best interest. Document why the strategy's risks, fees, and lockup length are suitable for that client. Be clear in advance about reporting, updates, and how the position fits into ongoing reviews.

If private equity is becoming a bigger part of your practice, this glossary entry is only a first step. For a deeper look at how private equity is showing up in RIA portfolios today, check out this article.

Is investing in private equity worth it?

Whether private equity is a worthwhile investment depends on the client. You will need to weigh the potential benefits against trade‑offs in risk, cost, and access.

Pros of PE investing

Here are some potential benefits of adding private equity to a client's mix:

• higher returns: offers the chance to earn a return premium over public markets, especially with strong managers and careful fund selection
• diversification: can lower overall portfolio volatility by adding assets that do not move in lockstep with listed stocks and bonds
• access to unique opportunities: opens exposure to faster‑growing private companies that clients cannot reach through public markets alone
• value creation: relies on managers who actively improve portfolio companies through operational changes, strategic shifts, and capital structure work

Cons of PE investing

Meanwhile, here are some potential drawbacks to keep in mind:

• illiquidity: locks up capital for long periods, often 10 years or more, with limited options to exit early
• high risk: can involve huge downsides, including the possibility of permanent loss and less transparency than public securities
• high costs and minimums: typically requires large commitments and charges higher fees than most traditional funds, which can eat into returns
• manager dependence: outcomes vary widely across managers, so poor selection can leave clients bearing the risks without seeing the expected return premium

For most clients, private equity investment is not a simple yes or no. It is a tool that fits only when goals, risk tolerance, liquidity, and time horizon all line up. Test those factors honestly, then decide whether the potential return and diversification benefits justify the added complexity and illiquidity for a specific client.

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