Private equity is specifically a kind of stock ownership in a company that is not publicly traded on a stock exchange. In recent times though it has been what people call private funds that use capital to takeover companies (many times through leveraged buyouts) with the goal to rebuild the company’s business model to create added value and later sell the business for a profit. So now ‘private equity’ is usually what investment funds that purchase and streamline private companies is usually called.
Large private equity firms will at times even take a publicly traded company private and then later take it public again on the stock exchange after creating more value in the company’s operations. A private equity fund is almost always set up as a limited partnership.
The majority of private equity investments are made by venture capitalists, angel investors, and/or a private equity funds. The capital is supplied in exchange for a private equity stake in the company (A percentage of ownership). The goal of these types of investors is to give a private company the much needed capital to expand its business and grow in sales and market share and increase the company’s value.
Investments in private equity is a very risky investment as the value can go to zero. Private equity investments can have hundreds or thousands times the return on the original investment of capital if the company is successful and eventually goes public with an Initial Public Offering (IPO). Most private equity investors look at an IPO as their exit strategy once their lock up period ends.
Private equity works because the reward is worth the risk and most private equity investors have diversified across many companies and they just need one to make all the positions pay off.