What Are Equity Investments in Private Markets?
Equity investments in private markets
Author: The Carta Team
Read time: 10 minutes
Published date: April 3, 2026
Learn the fundamentals of equity investments, including how you structure the deal and the operational challenges of managing the asset throughout its lifecycle.
What is an equity investment?
An equity investment is the purchasing of an ownership interest in a private company. In exchange for capital, you receive a share of the business, called equity, which gives you a claim on its future profits and assets. For equity investors in venture capital (VC) and private equity (PE) firms, these investments are the core assets that drive fund performance and returns for their investors.
How private market equity differs from public stocks
While both involve ownership, making an investment in a private company’s equity is fundamentally different from buying shares of a public company on a stock exchange. These differences create unique challenges and opportunities for you as an investor, particularly around how investments are valued, managed, and eventually sold during liquidity events. Understanding this distinction is key to navigating the world of private capital.
This contrast also explains why private market investing requires specialized operational expertise and technology. The lack of daily pricing and public information demands a more hands-on approach to tracking performance and managing risk. Private market equity investments are typically illiquid and held for years before a sale or exit—a long-term horizon often shielded from the daily volatility of public markets. This long-term horizon is reflected in executive compensation structures: From 2022 to 2025, 42.8% of PE-backed corporations used four-year vesting with a one-year cliff and monthly vesting, while 44% of non-PE-backed corporations followed the same pattern.
From the perspective of a fund manager investing in a portfolio company:
| Feature | Public market stocks | Private market equity |
|---|---|---|
| Liquidity | High; can be bought or sold daily on a stock market. | Low; investments are illiquid and held for many years. |
| Valuation | Priced daily by the market. | Valued periodically through complex, private assessments. |
| Information | Highly regulated with public financial disclosures. | Information is private and access is limited. |
| Investor role | Typically passive. | Often active, with board seats and operational influence. |
Types of equity interests in private companies
An equity investment in a private company is more complex than just buying a share of public company stock. The type of equity you receive is defined in legal documents and determines your rights, including your priority for repayment in a sale or liquidation. Different types of equity are used in different situations to balance the needs of management teams, employees, and investors.
Common stock: This is the most basic form of ownership and includes founder shares typically held by the original team and employees. It usually comes with voting rights, which allow holders to have a say in company decisions, but it is last in line for payment if the company is sold or liquidated.
Preferred stock: This is the security most often issued to investors in a VC financing. Preferred stock includes special rights and protections, such as liquidation preferences, which ensure investors get their money back before common stockholders in an exit.
Profits interest units (PIU): Often used in companies structured as limited liability companies (LLC), a profits interest is a form of management equity that grants the holder a share of the company's future growth in value.
How are equity investments structured?
To make large, long-term equity investments in private companies, fund managers pool capital from multiple investors, known as limited partners (LP). This capital is gathered into private investment funds, which are specialized legal entities designed to make and manage these investments.
The two primary structures you'll use for this purpose are the traditional investment fund and the more targeted special purpose vehicle (SPV). Each serves a different strategic purpose, offering you flexibility in how you deploy capital and capture opportunities.
The role of the limited partnership agreement
The foundational legal document for any fund or SPV is the limited partnership agreement (LPA). The LPA is the rulebook that governs the relationship between you as the fund manager, known as the general partner (GP), and your investors, the LPs. It outlines the rights and responsibilities of each party, ensuring everyone is on the same page.
Managing the private equity investment lifecycle
From your fund's perspective, an equity investment is an ongoing process that spans years. This journey, from initial investment to final exit, is known as the investment lifecycle. Each stage presents distinct operational challenges for your fund's finance team, led by the CFO or controller.
Closing the deal and onboarding investors
The lifecycle begins when your fund finalizes an investment. This administrative process involves executing legal documents, calling capital from LPs to fund the investment, and wiring the funds to the portfolio company for their equity management needs.
Valuing and monitoring portfolio companies
Unlike public stocks, your PE investments do not have a daily market price. You are required by accounting standards, such as ASC 820, to determine the fair value of your investments on a regular basis.
Accounting for investments and reporting to LPs
The value of each equity investment must be accurately recorded in your fund's general ledger (GL). This information flows into key financial statements, such as the schedule of investments (SOI) and the Partners' Capital Account Statement (PCAP), which you share with your LPs.
Managing liquidity and realizing returns
The investment lifecycle concludes when your fund exits the investment to return capital and profits to your LPs. The primary exit strategies are a merger or acquisition (M&A), an initial public offering (IPO), or secondary transactions regarding the fund's stake.
The operational challenges of managing equity investments
Maintaining a single source of truth from cap table to fund
As a fund manager, you often find yourself managing critical data across a patchwork of disconnected tools. This can include spreadsheets for portfolio tracking, separate software for cap table management, and another system for fund accounting.
Ensuring audit readiness and compliance
The annual fund audit is a high-stakes process where accounting and valuations are scrutinized. Auditors require a clear, defensible evidence trail for every number in your financial statements, as records must be readily available for SEC examinations to prove actual compliance.
Delivering transparency to limited partners
In today's market, your LPs are demanding more frequent, detailed reporting, especially around distributions to paid-in capital (DPI) visibility, which has become the critical metric in a market where exits are rarer.
A connected platform for the entire investment lifecycle
The solution to these operational challenges lies in a single, integrated platform that serves as the operating system for private companies and capital. Instead of a collection of siloed products, a connected platform unifies fund administration, portfolio management, and investor reporting into one seamless workflow.
Frequently asked questions about equity investments
What are examples of equity investments in private markets?
Common examples include a VC fund making a Series A investment in a technology startup or a PE fund executing a buyout on an established, family-owned manufacturing business.
How do LPs evaluate equity as an investment?
LPs typically assess equity based on fund performance metrics, often ranking funds within their vintage year by internal rate of return (IRR) and multiple on invested capital (MOIC), to evaluate returns.