Private Equity Explained: How PE Works & Strategies
Private equity: The engine of transformative capital
Author: The Carta Team
Read time: 13 minutes
Published date: 9 March 2026
Learn the fundamentals of private equity, including how funds are structured, common investment strategies, and the operational mechanics of value creation and fund administration.
Contents
- What is private equity?
- What is a private equity firm?
- What is a private equity fund?
- The roles of general partners and limited partners
- The fund lifecycle: From formation to exit
- Types of private equity investments
- How private equity firms create value
- How do private equity firms make money?
- The private equity industry and market outlook
- How to invest in private equity
- Frequently asked questions about private equity
What is private equity?
Private equity (PE) is a type of investment where firms pool capital from investors to acquire ownership stakes in private companies with the goal of improving operational efficiency, increasing profitability, and ultimately selling at a higher valuation for a profit later. PE is an alternative investment asset class, meaning it's a category of investment that falls outside of traditional investments like public company stocks and bonds.
What is a private equity firm?
A traditional private equity firm is an investor that raises PE funds to acquire a majority stake in companies.
What is a private equity fund?
PE investments are typically made through a dedicated investment vehicle, similar to other private funds, called a private equity fund.
The roles of general partners and limited partners
- General partners (GP): These are the investment professionals at the PE firm. They are the active managers responsible for the entire investment process.
- Limited partners (LP): These are the passive investors who commit capital to the fund.
The fund lifecycle: From formation to exit
A PE fund has a finite life, typically structured with a 10-year fund term. The lifecycle is broken down into several distinct phases:
- Fundraising: The GP markets the fund to potential LPs.
- Investing: The GP identifies and manages deal flow to perform due diligence on target companies.
- Value creation: The GP uses portfolio management to work closely with the management of its portfolio companies.
- Exit: The GP seeks to sell its stake in the portfolio companies to realize a profit.
- Distribution: The GP returns the initial capital and any profits to the LPs as a distribution.
Types of private equity investments
The term "private equity" is an umbrella that covers several different investment strategies.
Leveraged buyout
Leveraged buyouts (LBO) are the most common PE investment strategy.
Growth equity
PE firms that specialize in growth equity investments purchase a minority stake in mature companies that are growing revenue.
Venture capital
Venture capital (VC) is technically a form of PE, but it is distinct enough that it's often considered its own asset class.
Private equity vs. venture capital
| Private equity | Venture capital | |
|---|---|---|
| Company stage | Mature, established businesses | Early-stage startups |
| Ownership stake | Typically majority (control) | Typically minority |
| Investment size | From eight figures to $10 billion+ | Seven- and eight-figure deals |
| Use of debt | Often high (in LBOs) | Low to none |
| Value creation | Operational efficiency, cost savings | Revenue growth, market share |
| Industry focus | Invests in every industry | Majority of deals in tech and healthcare |
| Risk profile | Lower risk | Higher risk |
How private equity firms create value
Modern PE firms act as strategic partners, working to build stronger, more resilient businesses through a variety of methods.
Through operational improvements
Today's PE firms bring deep industry and functional expertise to their portfolio companies.
Through broad-based employee ownership
An innovative and increasingly important value creation lever is extending equity compensation to portfolio companies’ employees.
How do private equity firms make money?
PE firms charge investors an annual management fee and earn carried interest—a share of the fund’s profits.
The private equity industry and market outlook
The global PE industry is undergoing significant transformation amidst evolving market dynamics.
How to invest in private equity
Direct investment in PE is generally limited to accredited investors.
Frequently asked questions about private equity
What is the difference between a private equity firm and a private equity fund?
A PE firm is the management company that employs the investment professionals. A PE fund is the specific pool of capital raised by that firm.
What are the risks of investing in private equity?
The primary risks for investors are illiquidity, as capital is locked up for many years, and potential for capital loss if the fund performance does not meet expectations.