"What is the Role of Private Equity in Today's Investment Landscape?"

Private equity (PE) describes investments that represent an equity interest in a privately held company. 

Any business that is not a public company is part of the substantial private company universe, which includes millions of US businesses compared with the few thousand that are public companies. That also means a large part of the private universe is startups and small businesses, along with some more established companies that have not yet gone public or choose to remain private. 

While similar in concept to equity securities in publicly held companies, private equity investments have sufficiently unique form and characteristics to consider them a separate asset class. Primary among these characteristics are high risk, illiquidity, and finite durations.

Private equity shares can be acquired directly from an issuing company, though because they have high risk and are not liquid, it is more common to acquire private equity through funds for diversification and professional management. 

Investing in private equity means understanding the uniqueness of the asset class and its various subclasses, the mechanics of a private equity fund, and the risks and returns of the investment.

Investments in private companies can be in the form of primary investments made directly with the target company or secondary transactions which are made by acquiring shares from existing investors. For diversification purposes, both primary and secondary PE investments are made primarily through a fund that is set up as a limited partnership.

PE funds involve the following entities:

General Partner (GP) – The General Partner initiates and administers the fund, selects and manages the investments, collects money from investors, and distributes money back to investors when investments are sold. General Partners are usually a specialized Private Equity Firms.

Limited Partners (LP) – The investors in the fund are the limited partners.

Target companies – The private companies in which the fund invests are the target companies.

The private equity secondary market allows investors to liquidate their fund interests before the end of the fund’s term. Among other characteristics, trading on the secondary market alters the cash flow profile, provides urgent liquidity and lowers private equity blind pool risk for buyers. These aspects have led to the secondary market growing rapidly as an alternative option for investors and equity fund managers alike.