Private Equity
Ownership in companies that are not listed on a public exchange.
The holding period is part of the investment
Private equity typically involves ownership in companies that do not trade on a public exchange. Capital can remain committed for years while the manager acquires, operates, restructures or grows portfolio companies and eventually seeks an exit.
That makes liquidity fundamentally different from owning a public stock.
Returns depend not only on business performance but also on acquisition price, leverage, operating execution, fees and the valuation achieved when the investment is sold.
The fund structure matters
Private-equity investors usually commit capital to a fund rather than purchase a continuously tradable portfolio. Capital may be called over time, and distributions can arrive unpredictably as investments are sold.
Vintage year, strategy, manager selection and fee structure can therefore have an unusually large influence on results. Reported interim values should not be confused with cash that an investor could necessarily realize immediately.
Common mistakes
- ×Reading IRR as if it were an annual compound return
- ×Underestimating the timing and size of future capital calls
- ×Overlooking eligibility rules and multi-year lock-ups
- ×Assuming a manager's prior fund performance carries forward