A private equity firm buys controlling stakes in established companies, improves them over three to seven years, and sells them for more than it paid. The classic tool is the leveraged buyout: acquire a business using a mix of the fund's equity and a large slug of borrowed money, then use the company's own cash flow to pay down that debt while making the business worth more.
The firm you see, the brand on the door, is the general partner. The money it invests is not mostly its own. It is committed by limited partners, the pensions, endowments, sovereigns and family offices covered later in this track, into a closed-end fund the GP raises and then spends the next decade deploying and harvesting.
What they buy and why
Buyout firms target mature, cash-generative companies: businesses with predictable revenue, a defensible position and room to improve. Software, healthcare services, industrials and consumer brands are perennial hunting grounds because they throw off the stable cash flow that debt requires.
The thesis for any deal usually rests on three levers: buy well, improve the business, and use leverage. Buying well means paying a sensible entry multiple. Improving means growing revenue, widening margins, tucking in acquisitions or professionalising management. Leverage magnifies whatever equity return those first two produce, in both directions.
How they make money
A PE firm earns two ways. The management fee, typically 1.5 to 2 percent of committed capital, keeps the lights on and pays the team during the years before exits arrive. The real prize is carried interest: usually 20 percent of the profits above a hurdle rate, often 8 percent, once LPs have their capital back.
Because carry dwarfs fees for a successful fund, the incentive is to compound returns, not gather assets, at least in theory. In practice the largest firms have discovered that assets under management is its own reliable business, which is why the biggest names have pushed into credit, real estate and infrastructure to grow the fee base.
How they are organised
Deal teams are lean and hierarchical: partners set strategy and sit on boards, principals and VPs run deals, associates and analysts build the models and manage diligence. Above the deal teams sit investment committees that approve or kill each transaction, and increasingly a separate operating team of former executives who work inside portfolio companies after close.
The whole apparatus is built around a repeatable loop: source proprietary deals, underwrite them with conservative debt assumptions, win the auction without overpaying, hold and improve, then exit through a sale to another sponsor, a strategic buyer or the public market. The firms that endure are the ones that keep that loop disciplined across cycles.