Private equity (PE) firms buy companies, improve them, and sell them for a profit. They raise capital from institutional investors (pension funds, endowments) and wealthy individuals, use leverage (borrowed money) to acquire companies, then work on increasing their value over 3-7 years before exiting.
The PE playbook: acquire a company, cut costs, optimize operations, grow revenue, pay down debt, and sell at a higher multiple. Exit strategies include IPOs, selling to another PE firm, or selling to a strategic buyer. Top PE firms include Blackstone ($1 trillion AUM), KKR, Apollo, and Carlyle.
PE has generated average annual returns of 14-16% over the past two decades — outperforming public markets. However, PE investments are illiquid (locked up for years), carry high fees (2% management + 20% performance fee), and the heavy use of leverage increases risk. The industry manages over $8 trillion globally.