What is Private Equity?

- Private equity can be divided generally into two streams, fund investing and company investing. Fund investing is essentially one level removed from company investing, as the fund will in turn invest in underlying portfolio companies. For this reason company investing is often called "direct" investing.

- Fund investments are in turn divided into primary and secondary. A primary investment is a commitment to invest in a new fund which is as yet unformed. A secondary investment is the purchase and transfer of an interest in an existing fund from another investor.

- Direct private equity investing, i.e., at the company rather than the fund level, can be described as typically being an investment of an equity nature in a company which is not listed on any public equity market. While there are a number of possible exceptions, this definition remains broadly true.

- All private equity investing, whether at the fund or company level, can be subdivided into buyout and venture. Buyout transactions typically include debt and involve established and usually profitable companies. Venture transactions typically do not include debt and involve young, even start-up companies and some element of technological innovation.

- Fundamental to a proper appreciation of how private equity funds work is an understanding of the difference between allocated, committed, drawndown and invested capital. Allocated capital represents that part of the overall asset mix which has been set aside for investment in private equity. Committed capital is that amount of allocated capital which has been committed. Drawndown capital is that part of committed capital which has been paid on demand. Invested capital is that part of drawndown capital which has actually been invested in portfolio companies (the other main use of drwandown capital being the payment of fees and expenses).

- The bulk of private equity funds are these days typically structured as institutional limited partnerships, though other legal forms exist, including some which are quoted and/or aimed at least in part at retail investors.

- A private equity fund may be thought of as a stream of cashflows (both into and out of the fund) which are essentially unpredictable both as to their timing and amount.

- Sole investment powers rest with the GP (manager) of the fund. Thus all private equity fund investors are wholly passive in the strict legal sense.

- Fundraising typically takes at 3-year intervals, although some funds, such as secondary funds, have in recent years been investing more rapidly, and thus fundraising at shorter intervals. This phenomenon also occurred with venture funds during the bubble period.