Private Equity Overview: Private equity funds are investment companies that, as a rule, do not hold publicly-traded securities. Instead, they normally seek equity stakes (that is, partial ownership) in private companies. They also may invest in so-called private placements of securities from public companies. That is, securities that are not offered to the general public or traded in the public securities markets. Venture capital is a specialized subcategory of private equity. Both are high risk, high reward investment approaches.
Organization: Many private equity funds are standalone operations that draw their investment pools from wealthy individuals, pension funds and other investment managers. Most are private companies themselves, but some have been publicly traded entities. Other private equity funds are subsidiaries or divisions of larger financial services firms.
Characteristics: Private equity funds tend to have much longer investment horizons than funds that hold publicly-traded securities. There are several reasons for this. First, securities issued by private companies (as well as private placements from public companies) are highly illiquid, since they are not traded in public securities markets. Also, the opportunities for resale to another party are highly limited, with possible contractual and regulatory constraints adding to the difficulties. Second, some private equity funds tend to act as partners in managing the companies that they back, rather than being merely passive investors.
Private Equity Fees: Recently, a growing number of investors have been challenging the fees charged by private equity funds, especially since they often far exceed the actual costs of fund management. See this primer on private equity fees for more details.
Career opportunities: Private equity funds rely upon in-house expertise in a variety of financial disciplines, such as securities research, money management and investment banking.
Additionally, since some private equity funds frequently take a major role in decision-making at the companies in which they invest, experience in a variety of non-financial areas can be valuable, such as engineering, electronics, information technology, the Internet, manufacturing, chemicals, pharmaceuticals, and many others. The exact non-financial skills in demand at a given private equity fund will depend on the industries or technologies that it focuses upon, and on how hands-on it prefers to be in working with the management of the companies that it supports financially.
In any case, multidisciplinary experience is valued especially highly, such as someone who combines an engineering or other technical background with one in financial analysis. Private equity funds, whether standalone or part of a larger financial firm, tend to have lean staffing. This creates opportunities for large individual financial rewards, but at the cost of a frenetic pace, generally with long hours and frequent business travel.