Private Equity

How does a private equity firm work?

2 Answer(s)


One of the most important strategies that the PE firm uses is leveraged buyout.
Leveraged buyout, LBO or Buyout refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage.The companies involved in these transactions are typically mature and generate operating cash flows.Private equity firms view target companies as either Platform companies which have sufficient scale and a successful business model to act as a stand-alone entity, or as add-on or tuck-in acquisitions, which would include companies with insufficient scale or other deficits.


Private Equity Firms get their money from Limited Partners (LP's) such as pension funds, university endowments, rich individuals etc.

This money is managed by a bunch of GP's (General Partners). They works on a 2/20 structure. The GP's charge 2% of assets as management fee and an additional 20% of all profits.

LP's expect that their money will grow 4-6x in 5-7 years.