What is private equity?
Private equity is a form of investment in which capital is raised to buy, develop and later sell unlisted companies. The goal is to increase value through strategic and operational improvements.
Private equity firms usually come in as active owners, which means they work closely with management to improve structure, profitability and growth opportunities.
In practice, private equity investments are often made through funds in which investors commit capital for several years. The fund then makes a number of investments in different companies and works actively to increase their value. Once the companies have developed, they are sold on or listed on a stock exchange, and the return is shared between the investors and the manager.
How private equity works
Here are some common features that make it easier to understand how private equity works.
- Investment in unlisted companies
- Active ownership and development
- Capital is tied up for a longer period
- Returns on sale
- Focus on increasing value
Once you know these parts, it becomes easier to understand how private equity generates returns and what level of risk comes with the investment.
How private equity works in practice
Worth bearing in mind
When you invest in private equity, it is important to understand that the capital is tied up for a long time. Investments are made in companies that usually require active development, which means both higher potential and higher risk. It is therefore central to examine the strategy, the track record and the type of companies the private equity firm invests in.
It is also wise to be aware that returns can vary depending on the economic cycle, execution and how well the company develops. Since the investments are not traded on a stock exchange, liquidity is low. This means you should have a longer time horizon and be comfortable with the fact that the investment cannot be sold at any time.
Frequently asked questions
What sets private equity apart from ordinary share investments?
Private equity invests in unlisted companies and works actively to develop them, while share investments are usually made in listed companies with continuous trading.
How do you make money from private equity?
By the companies developing and being sold on at a profit. The return is shared between the investors in the fund.
Is private equity risky?
Yes. Because the companies are unlisted and require active development, the uncertainty is higher, but the potential can also be greater.
Can private individuals invest in private equity?
Yes, but often through funds or platforms, since direct investments require more capital and a longer lock-in period.
How long is a typical investment period?
Often between five and ten years, depending on the company's development and the fund's strategy.