A Primer on Private Equity




Private equity buys up assets — everything from housing to ambulance companies — often at a bargain. Credit Jason Henry for The New York Times

Private equity firms, once known as corporate raiders, are now huge, influential and everywhere in everyday American life. In a series of stories, we chronicle private equity’s ascendance, and some of the problems it has caused. (Read the first part »)

Here is a brief primer on the industry.

What is private equity?

In general, private equity refers to investment firms that use large chunks of money from pension funds and endowments to buy up businesses and other assets. Private equity firms are not as regulated as the banks.

How does it make money?

Private equity buys up assets (everything from foreclosed homes to ambulance companies) at a bargain. It often targets assets that are in trouble — businesses that are losing money, for example — and seeks to make them profitable. Private equity typically holds on to businesses before selling them or taking them public on the stock market.

How much money does private equity make?

A lot. Several private equity executives make more than $100 million a year, including stock and dividends. Private equity firms are generally paid, in Wall Street parlance, 2 and 20. That means it makes 2 percent of the money it manages. And it takes a 20 percent cut of the profits above a certain threshold.

How can someone invest in it?

To play ball, you typically need to have a net worth of at least $1 million. But most likely, you will share in the industry’s risks and returns through your pension plan that invests in private equity.

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