The simplest definition of private equity is that it is equity – that is, shares representing ownership of or an interest in an entity – that is not publicly listed or traded. A source of investment capital, private equity actually derives from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to take them private, eventually become delisting them from public stock exchanges. Most of the private equity industry is made up of large institutional investors, such as pension funds, and large private equity firms funded by a group of accredited investors.
Since the basis of private equity investment is direct investment into a firm, often to gain a significant level of influence over the firm’s operations, quite a large capital outlay is required, which is why larger funds with deep pockets dominate the industry. The minimum amount of capital required for investors can vary depending on the firm and fund. Some funds have a $250,000 minimum investment requirement; others can require millions of dollars.
The underlying motivation for such commitments is of course the pursuit of achieving a positive return on investment. Partners at private-equity firms raise funds and manage these monies to yield favorable returns for their shareholder clients, typically with an investment horizon between four and seven years.