The term “private equity” denotes capital invested directly in a company by private investors or investment banks. By investing in a startup or other non-public company, investors become co-owners of that company. In other words, they have equity in the ownership of that company.
Unlike equity in public companies, which can be bought and sold on the stock market, private equity is less easily transferred from one owner to another.
In many cases, private equity is obtained by private equity firms or private equity funds. These aim to buy up equity in a company in order to quickly raise the value of that company with the goal of selling their shares at a higher price (after an initial public offering, for example).
Depending on a company’s development phase, this practice may take the form of venture capital (when shares in startups are purchased), growth capital (in the case of rapidly growing companies) or buy-outs (in the case of mature companies).
As an investor, you can either invest directly in a private equity firm, or invest in a private equity fund or a more broadly invested fund of funds.
Private equity is classified as an alternative investment, and as such it comes with a lot of risk. As a rule, private equity investment is only recommended for experienced, professional investors.