A private equity firm invests in businesses to enhance the value and growth of the company. The firm then sells the company for a profit back to the original investors. The firm also manages the investments and earns fees from performance fees and management fees. The fee structure is not always transparent. Some private equity firms don’t make it clear what they charge and what their role is.
Private equity firms raise money from institutional investors, including pension funds, insurance companies, sovereign wealth funds, family offices, and individuals. They invest in privately-held businesses and then sell them several years later. These types of investments tend to yield better returns than public-market investments. However, private equity firms must wait 10 years or more to realize a profit from a transaction.
To break into the private equity industry, it helps to have a strong finance background. Most firms look for MBA or Master of Finance graduates. Another common pathway into this field is working as an investment banker. Investing bankers gain experience in financial modeling and due diligence, and these skills directly translate to private equity work. Moreover, many private equity firms require experience in other fields in addition to finance.
Private equity firms are often structured as a partnership. The general partners select investments and form a brain trust to help guide the restructuring of the target company. The limited partners contribute money but do not participate in making decisions. Almost all of the participants in private equity funds are wealthy individuals with high net worths. A private equity firm usually requires a minimum investment of $250,000.