LegalLingo: What is ‘Private Equity’?

May 18, 2022
1 minutes

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts. This can result in a wall of jargon, which students and trainees often find difficult to understand. We’ve therefore introduced LegalLingo to break down these concepts into bite-size explanations to make the industry more accessible for aspiring trainees.

To kick off, if you’ve ever wondered what ‘private equity’ actually is but been too ashamed to ask, here is our LegalLingo explanation:

A “private equity fund” is an investment fund, often in the form of a limited partnership, that uses money invested by private investors to acquire shares in private companies, either directly or by delisting public securities (hence 'Private Equity' or 'PE'). There are also funds that lend debt, but these are usually referred to as 'credit funds'. Investors in the PE fund, for example sovereign wealth funds or pension funds, become limited partners (or 'LPs') in the PE fund. Via the PE fund, these investors deploy considerable capital in moderate-term investments (often referred to as 'portfolio companies') in expectation of significant returns from the pre-agreed fund investment strategy.

The investments for the PE fund are sourced, implemented and managed by the general partner, or manager, of the fund. In practice, this is a group of individuals otherwise known as the 'private equity deal executives' who are rewarded through a combination of bonuses, co-investment and carried interest for executing investments and, in particular, making successful returns.

The investments are then sold for a capital gain with the profits divided between the LPs and the fund managers.

If you found this helpful, why not check out the other LegalLingo posts on our website? We’ll be adding to it regularly so keep an eye out for them!