What is private equity in simple terms?
What Is Private Equity? Private equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors.
Private equity is ownership or interest in entities that aren't publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges.
Private equity (PE) is a form of financing where money, or capital, is invested into a company. Typically, PE investments are made into mature businesses in traditional industries in exchange for equity, or ownership stake.
Similar to a mutual fund or hedge fund, a private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund.
Private equity firms invest the money they collect on behalf of the fund's investors, usually by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses — called portfolio companies — more valuable so they can sell them later at a profit.
Because private equity investments take a long-term approach to capitalising new businesses, developing innovative business models and restructuring distressed businesses, they tend not to have high correlations with public equity funds, making them a desirable diversifier in investment portfolios.
Overview. Private equity is a very lucrative career. As an asset class, private equity has enjoyed tremendous success over the past decade. Investors around the globe continue to pile their money into private equity firms.
Private equity is a core pillar of BlackRock's alternatives platform. BlackRock's Private Equity teams manage USD$41.9 billion in capital commitments across direct, primary, secondary and co-investments.
Private equity firms typically invest in private companies and see returns on investment by improving the company's profits. On the other hand, hedge funds use complex investing techniques, like hedging and leveraging, to see returns on investments in the market via securities like stocks, options, and futures.
The private equity owned company will have the same basic benefits of healthcare, life insurance, 401(k) and disability benefits as the public company, but often will not have all of the ancillary benefit programs. The larger the private equity owned company, the more likely they will have public company type benefits.
How much money do you need for a private equity fund?
Many private equity funds require a minimum commitment of $10 million or more. Through Morgan Stanley, however, you can participate in many of these funds for a minimum of $250,000.
The minimum investment in private equity funds is typically $25 million, although it sometimes can be as low as $250,000.
| Private Equity Salary Data (2023) | ||
|---|---|---|
| 1st Year Associate | $135k – $155k | $140k – $230k |
| 2nd Year Associate | $160k – $180k | $170k – $270k |
| 3rd Year Associate | $180k – $200k | $180k – $300k |
| Senior Associate | $200k – $220k | $210k – $390k |
What are the cons of private equity investing? Private equity investments are illiquid: Investor's funds are locked for a certain period. As such, investors in private equity must have a long-term investment horizon and be willing to hold their investments for a few years, if not more.
They are often seen as ruthless cost-cutters who gut companies and lay off workers in order to make a quick profit. And while it is true that some private equity firms do engage in these practices, it is important to remember that not all private equity firms are evil.
Landing a career in private equity is very difficult because there are few jobs on the market in this profession and so it can be very competitive. Coming into private equity with no experience is impossible, so finding an internship or having previous experience in a related field is highly recommended.
Many MDs and Partners stay in private equity indefinitely because there's no reason to leave unless they're forced out or the firm collapses.
Heidrick & Struggle's data suggests that at the top end, a managing partner in a private equity firm with at least $1bn in Assets Under Management (AUM), can expect to earn at least $3.5m in salaries and bonuses, plus around $35m in carried interest over a fund's lifecycle (typically around five years).
The average base compensation among US CEOs surveyed for this report was $510,000 in 2023, and the average cash bonus received in 2022 was $390,000, for a total average cash compensation of $908,000.
BlackRock was founded in 1988 by Larry Fink, Robert S. Kapito, Susan Wagner, Barbara Novick, Ben Golub, Hugh Frater, Ralph Schlosstein, and Keith Anderson to provide institutional clients with asset management services from a risk management perspective.
Who owns the world BlackRock?
BlackRock's largest institutional shareholders are Vanguard Group, BlackRock Fund Advisors, State Street Global Advisors, Temasek Holdings, and Bank of America. The company's largest individual shareholders include original BlackRock owners and founders Larry Fink and Susan L. Wagner, Robert S.
Both offset their high-risk investments with safer investments, but hedge funds tend to be riskier as they focus on earning high returns on short time frame investments. It is hard to make a generalization on the level of risk, as individual funds vary so much based on their investing strategies.
In short, Warren Buffett is not a hedge fund manager, and Berkshire Hathaway is not a hedge fund. Buffett is one of the few billionaires who amassed a fortune by building a successful business and managing a stock portfolio simultaneously.
Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity. At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.
Private equity firms are investors with vast experience in operating businesses. Although they're not business operators, they can use the expertise to guide the company to sound decisions and good ROI. With private equity buyers, your business can explore other lucrative opportunities.
