Private Equity Funds: Role, Operations, And Types 

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Published by Mateusz Muszynski
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Private equity (PE) funds play a crucial role in the capital markets by helping to bridge the gap between investors and private companies. For business owners or top management, PE funds can help provide access to much-needed capital as well as guidance with acquisitions, mergers, and other strategies. And – for investors – PE funds open the door to the hard-to-access world of investing in private companies.

As of 2022, private equity funds controlled $6 trillion in assets in the US alone, spread across real estate and business.

With that in mind, let’s explore everything that you need to know about private equity funds.

What Is a Private Equity Fund?

private equity fund is an investment partnership that buys and manages companies before selling them at a profit. These partnerships typically focus on privately held companies, although they will occasionally buy publicly traded companies and take them private.

The general goal of most private equity firms is to take control of a business for a short period of time, add value to it, and then resell it at a profit. In this sense, it’s similar to an investor buying a house and flipping it. But, instead of buying a home, PE firms buy businesses.

Private equity firms raise money from institutional investors, such as mutual funds, insurance companies, or pensions, and high-net-worth individuals.

Private equity is often used synonymously with venture capital. While these two funds have the same goal of providing a return for their shareholders, VC firms primarily target high-growth startups while PE funds focus on more mature businesses.

Types of PE Fund

There are three different strategies that private equity funds use, according to Harvard Business School online.

Venture Capital

Venture capital is when a private equity fund invests in early-stage startups. 

These types of investments are typically high-risk, high-reward. In other words, there is a high chance that the startup will fail. But, if the startup succeeds then it can provide a massive ROI to investors. VC investors will usually purchase a minority stake in the company and leave the original founders in place to continue running the company.

Growth Equity 

Growth equity is when a private equity fund purchases a minority stake in an established, growing company.

These investments are not as risky as venture capital because the startup has proven that it has a viable business model. At this point, the startup usually just needs an infusion of cash to help grow the company to the next level. PE funds will invest when they are confident about the future of the business, or if they know how to pivot or reposition the business for growth.

Similar to venture capital, PE funds will usually leave the original management team in place. Although, in some deals, they may want to have a say in the future direction of the company.


A buyout – also known as an acquisition – is when a private equity fund purchases a controlling share in a mature company. This type of investment makes up the largest portion of funds in the private equity space.

These deals can be either conducted by the company’s management (management buyout) or funded with borrowed money (leveraged).

In these types of deals, the original management team is sometimes replaced by a new management team.

Role of a PE Fund

The primary role of a private equity fund is to provide a return to its shareholders and managing partners. Usually, this goal is achieved by buying companies that will grow more valuable in the future. This can be done by investing passively in a growing company or actively investing in an underperforming company.

However, once a deal has been struck, a private equity fund can take on many different roles. There are many different ways that PE funds can provide value, outside of just the capital that they provide. For example:

  • Administrative Support: Assistance running the back-end of the business and implementing processes to help things run smoothly.
  • Organizational Structure: Recommending a corporate structure or controlling procedures that could make the business run more efficiently.
  • C-Suite Coaching: Providing coaching and expertise to the management team to improve their decision making.
  • Buy & Build Strategies: Recommending add-on acquisitions that could increase market share and make the company’s value offering more complementary
  • Realization of the Development Strategy: Not only can a PE fund recommend a development strategy but they can also help put plans into action.

How Do PE Funds Operate?

When a private equity fund is launched, the fund’s founders – also known as General Partners (GPs) – are responsible for raising capital from Limited Partners (LPs). Common LPs include accredited investors like pension funds, endowments, foundations, and high-net-worth individuals.

From there, the fund’s GPs manage the capital and yield favorable returns for their shareholders (LPs). Most commonly, this means finding opportunities to invest in growing companies. But, it can also mean identifying underperforming companies, improving them, and selling them at a profit. The Limited Partners typically collect a passive return and do not have a say in the fund’s management.

Private equity funds usually operate with an investment horizon of around 3-10 years depending on the investment strategy.  Once the time has come to reap the rewards of an investment, there are three strategies that a PE fund will use to exit a deal.

Common PE exit strategies:

  • Secondary Buyout (SBO): The sale of a portfolio company from one private equity firm to another. This type of transaction ends the PE fund’s involvement with the company.
  • Sale to a Strategic Investor: The sale of a portfolio company to a company or investor that is looking to expand their platforms or eliminate competition (as opposed to generating a financial return).
  • Initial Public Offering: Publicly offering the portfolio company’s for sale to institutional investors and retail investors.

Pros and Cons of PE Investments

Just like any asset class, private equity comes with a host of pros and cons from the perspective of the investor.

Pros of Private Equity

  • Potential for High Returns: Private equity investments can offer the potential for significant returns, often outperforming public market investments over the long term.
  • Active Management: Private equity firms typically take an active role in managing their portfolio companies. In many cases, this gives them a degree of control or influence over the companies they invest in. A fund may provide expertise, resources, and strategic guidance to help improve operational efficiency and profitability.
  • Long-Term Investment Horizon: Private equity investments are typically long-term in nature, which can align with the patient capital approach, allowing firms to make strategic decisions without the pressure of quarterly earnings reports.
  • Diversification: Investing in private equity can provide diversification within a broader investment portfolio, as it offers exposure to a different asset class than public stocks and bonds. For example, a private equity fund could invest in anything from a tech startup to a fast food chain.

Cons of Private Equity

  • Lack of Liquidity: Private equity investments are illiquid and often have long investment horizons (usually, between four and ten years). Investors may not be able to access their capital until the fund’s maturity or until specific exit events occur.
  • Risk and Uncertainty: Private equity investments are capable of generating very impressive returns. But, there is always the risk that investments will not be as successful as they are projected to be.
  • Limited Transparency: Private equity investments often lack the transparency of publicly traded securities. Investors may have limited visibility into the day-to-day operations of portfolio companies.
  • Regulatory and Tax Complexity: Private equity investments can be subject to complex regulatory and tax considerations, which may vary by jurisdiction and change over time.

Recent Trends For Private Equity Funds

So, where is the private equity industry headed in 2024 and beyond? The global consulting firm, McKinsey, addressed this question in its 2022 Global Private Market Review.

This review stated that, in 2022, private equity deal volume decreased 26% to $2.4 trillion, with the total deal count falling to just under 60,000. However, this is an unfair year-over-year comparison as 2021 was one of the busiest years for private equity – mainly fueled by the rise of Special Purpose Acquisition Companies (SPACs). 

Despite the decreased deal volume, more capital continued to flow into private equity, and total private assets under management (AUM) hit $11.7 million as of June 30, 2022. Assets managed by private equity firms have now grown at an annual rate of nearly 20% since 2017. This is a testament to the popularity – and profitability – of the industry.

We hope that you’ve found this article valuable when it comes to learning a bit more about private equity funds. 

Acquinox Advisors AG is a leading M&A advisory firm in Switzerland that specializes in helping businesses navigate the complex landscape of mergers and acquisitions.

If you are interested in selling a company or acquiring another company – especially in the tech sector – then please reach out to the Acquinox team to learn more.

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