Private Equity
Contents
Trevor L Taylor, a Miami private investor, founded Fortius Capital, whose focus includes property development and occasional private equity deals, and this entry explains the wider industry behind that second phrase. Private equity is the business of buying whole companies, or controlling stakes in them, with money pooled from large investors, improving or restructuring them over several years, and then selling them. Unlike shares traded on an exchange, these holdings change hands privately and rarely, which shapes everything about how the industry earns money, reports results and draws criticism.
How a buyout works
The workhorse of the industry is the leveraged buyout. The Guardian notes that these deals account for roughly three of every four dollars of private equity deals1, and compares them to flipping a house with a mortgage, with one crucial difference: the debt is carried by the acquired company itself, not by the buyer.
The sponsor, often called the general partner, raises a fund from pension plans, endowments, insurers and wealthy families, who become limited partners. The fund then buys companies, borrows heavily against them, and works to raise their earnings before an exit through a sale or a public listing. Borrowing magnifies the result on the equity in both directions. If the company grows and the debt is repaid, the owners keep a larger slice of a larger business. If earnings fall, the debt still has to be serviced.
Sponsors describe three broad ways of creating value. The first is operational: cutting waste, investing in growth, recruiting new managers and tying their pay to results. The second is financial: using debt cheaply and returning cash to the fund through dividends or refinancing. The third is the exit itself, selling at a higher multiple of earnings than the purchase price, sometimes because markets have risen and sometimes because the business has genuinely changed. Investors who evaluate a fund try to work out how much of a track record came from each source, since only the first is clearly repeatable.
From raiders to an asset class
The technique is older than the label. NPR recalled that in the 1980s corporate raiders bought companies using massive amounts of debt2, a practice that faded and then returned under the private equity name. Much of the 1980s borrowing came through high yield bonds, and the collapse of Drexel Burnham Lambert, the firm that had used junk bonds to finance high risk ventures3, marked the end of that first boom.
The second boom was larger. In 2006 the hospital company HCA agreed to a deal in which a group of private investors would acquire it for more than $30 billion4, one of a string of public companies taken private that year. After the financial crisis the industry grew again. Bloomberg Businessweek argued that private equity managers won the financial crisis5, helped by low interest rates, a friendly political climate and a long line of clients. Deals have kept getting bigger: the BBC reported that the purchase of Electronic Arts for $55 billion was described as the largest leveraged buyout in history6.
The pool of money waiting to be invested is enormous. S&P Global Market Intelligence counted $2.184 trillion in global private equity dry powder at the end of March 20257, down 5.2 percent from the record set at the end of 2023, as fundraising slowed for three straight years.
Returns, fees and liquidity
Measuring private equity performance is harder than it looks, because funds report values for companies that have not yet been sold. A study by Robert Harris, Tim Jenkinson and Steven Kaplan, using cash flow data from institutional investors, found that the average buyout fund returned at least 20 percent more per dollar than the S&P 5008, about three percentage points a year, net of fees. The same summary stressed that uneven disclosure had long raised doubts about the quality of earlier data. Other researchers using different periods have found returns closer to public markets, so the answer depends heavily on which funds and which years are measured.
Liquidity is the other side of the trade. Investors commit money for a decade or more and depend on exits to get it back. Bain’s annual report described a market where deals and exits rose, yet distributions as a portion of net asset value sank to the lowest rate in over a decade9, leaving many limited partners short of cash for new commitments. When distributions slow, sponsors turn to tools such as continuation funds, which move a company from an old fund into a new vehicle, and loans secured against a fund’s holdings. These can return some cash sooner, but they also raise questions about valuation and about whose interests the sponsor is serving.
Fees add another layer. Funds typically collect an annual management fee on committed or invested capital and keep a share of profits above a preferred return, so the gap between gross and net results can be wide. Comparing funds therefore means comparing net figures over full fund lives, not headline gains on a few successful exits.
The case against and the case for
Critics focus on what heavy borrowing does to the companies involved. The Washington Post reported on a study linking private equity ownership of retailers to the loss of 1.3 million jobs10, citing the collapse of Toys R Us after years of struggling with debt from its buyout. The Guardian’s long investigation describes an industry whose reach now extends to football clubs, water companies and care homes, and asks whether the industry has grown out of control.
Defenders answer that ownership by a sponsor with a concentrated stake and a fixed horizon can force decisions that dispersed public shareholders avoid, and that many buyouts end with stronger businesses. Both claims can be true of different deals. For a private investor, the practical lessons are the ones covered in the entries on reading a private deal memo backward and investment due diligence: understand the debt, the fees and the exit before the story. The house flipping comparison captures the idea, but today’s investors face something closer to a slow renovation, with holding periods long enough that patience and liquidity planning matter as much as the purchase price.
