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Private Equity (PE) is a form of investment that involves the pooling of capital from various sources such as corporations, wealthy individuals, and financial institutions, to invest in private companies. PE firms are responsible for managing the funds and making investment decisions on behalf of their investors.
Private equity funds have a specific target in mind when investing, such as the technology or healthcare sector, and the investment horizon is long-term, often lasting anywhere from 10 to 15 years. The goal of PE investment is to acquire companies, improve their operations and financial performance, and then sell them for a profit. This is why private equity is often referred to as a “buyout” industry.
Common Career Path
One common career path for individuals interested in private equity is to first gain experience in investment banking and then transition into a PE firm. This route is preferred by many due to the benefits of working in private equity, including better work-life balance, more interesting work, and higher salaries and bonuses. Salaries in private equity can range from $100,000 in the first year to over $160,000 in the third year.
How do Private Equity Firms Make Money?
Private equity firms make money through two main sources: management fees and carry interest. Management fees are fees charged to investors for managing their funds, and these fees are usually a percentage of the funds under management.
The carried interest, on the other hand, is a portion of the profits earned from the sale of the businesses that have been acquired and improved by the private equity firm. This portion is typically 20% of the profits, and it goes to the PE firm as a second type of fee.
In conclusion, private equity is a type of investment that involves pooling capital from various sources to invest in private companies. PE firms specialize in acquiring companies, improving their operations and financial performance, and selling them for a profit. Working in private equity can be a lucrative career path, and private equity firms make money through management fees and a portion of the profits earned from the sale of the businesses they acquire and improve.