Private equity: What is it, and why is it important?
At a glance:
• Private equity involves investing in unlisted companies with the aim of creating long-term value.
• Although this asset class offers the potential for differentiated returns, it carries specific risks.
• Investing in private equity requires knowledge and careful selection, as well as specialised, professional monitoring.
Would you like to invest in companies such as SpaceX, Stripe, or OpenAI? There’s good news and bad news.
The bad news is that many of these companies, some of the largest and most innovative in the world, are private and therefore not listed on the stock exchange. The good news is that there is an alternative way to invest.
It’s called Private Equity and enables you to invest directly in private companies, share in their growth, and receive dividends – or not, given that it is a higher risk investment – from a future sale or initial public offering (IPO).
Find out what private equity is, how it works, and what its key risks and benefits are. Learn about the most effective strategies for investing safely and securing a profit.
What is Private Equity?
In general terms, private equity refers to investment in private companies, i.e. those not listed on the stock exchange. These investments are usually made through specialised funds, venture capital rounds, or direct holdings in the capital of unlisted companies.
For companies, private equity is an alternative to traditional financing methods, such as bank loans or bond issues. It enables companies to raise capital for growth, restructuring, and professionalising their management. For investors, returns can come in various ways: through dividend distribution (although in private equity, the priority is often to reinvest profits in business growth), by selling their stake to third parties, or in some cases, through an Initial Public Offering (IPO).
Total amount invested in private equity (USD billion)
Source: S&P
Depending on the size of the investment and its structure, private equity can also give you influence over the company’s management and strategy. This influence primarily occurs when investments are made through funds with substantial equity holdings. These funds play an active role in strategy development, operational efficiency improvements, management professionalisation, and performance monitoring, with the aim of creating value in the medium and long term.
However, it should be noted that it is not possible to invest in any large private company at will, nor can you simply "buy” a seat on the board of directors of such groups. Due to legal restrictions, the high minimum investment amount and the low liquidity of this type of asset, access to holdings in these companies is usually limited to specialised funds and qualified investors.
In practice, private equity that is accessible to private investors focuses on small and medium-sized companies, family businesses, and growing businesses that are not listed on the stock exchange. These investments may be intended for various purposes, including accelerating expansion, financing internationalisation, management professionalisation, and preparing for future sales or stock market listing. Investing in undervalued companies or those undergoing restructuring is also common, as there is significant potential for creating medium- and long-term value.
The figures illustrate the continued growth of the private equity sector. According to the latest KPMG report, $2.1 trillion was invested in private equity in 2025 (approximately six times Portugal’s annual GDP and equivalent to the GDP of countries such as Italy and Brazil).
What type of Private Equity is available?
There are several distinct types of private equity, each with their own characteristics and investment strategies. However, they are not mutually exclusive and can often overlap. The main types of private equity include:
Growth Equity
This type of private equity involves investing in companies with significant growth potential. Investors provide the capital needed to drive business expansion, launch new products or services, enter new markets, and make strategic acquisitions. The aim is to accelerate the company’s growth and increase its value to generate substantial future returns.
Buyout
In this case, investors acquire a majority stake in an established company. There are two main types of buyouts: Leveraged Buyout (LBO) and Management Buyout (MBO).
In the first instance, the acquisition is primarily financed through debt, with the target company acting as collateral for the loan. The intention is to restructure the company, improve its operational efficiency, and boost its value in preparation for a potential sale or listing at a later stage.
In a Management Buyout (MBO), the company’s managers make the acquisition internally. This is often done in partnership with an external investor, with the resulting team taking control of the business with the aim of improving performance before selling their stake.
Distressed Private Equity
This type of private equity involves investing in companies experiencing financial difficulties or a crisis. Investors provide capital to restructure and revitalise these companies, typically by acquiring significant stakes. The aim is to generate substantial returns once the situation has stabilised.
Venture Capital
Venture capital is a type of private equity investment that focuses on companies in their initial stages with high growth potential. Venture capital investors provide promising companies, such as start-ups and other high-growth businesses, with capital and resources.
In addition to funding, investors offer strategic advice and expertise to help these companies develop and reach their full potential.
Mezzanine Capital
This form of private equity occupies an intermediate position in a company's capital structure, combining characteristics of both debt and equity. Mezzanine investors provide long-term capital with a higher expected return. This financing option is often used to fund expansion, acquisition, or recapitalization of established companies.
Advantages of investing in Private Equity
Investing in private equity can offer investors several benefits. The main ones are:
Potentially high returns
The objective of investing in private equity is to generate significant returns. Investors can achieve attractive returns over time by investing in companies with growth potential and implementing effective strategies.
Access to exclusive investment opportunities
Private equity provides investors with access to companies that are not open to public investment. This means investors can invest in companies before they go public, which can be a significant advantage.
Control and influence
Private equity investors typically acquire a majority stake in the companies they invest in, giving them control and influence over management and strategic decisions. This enables investors to actively work to improve business performance and growth, thereby increasing the likelihood of success.
Flexibility and a longer time horizon
Private equity investments tend to have a longer time horizon, enabling investors to adopt a long-term approach. This is particularly beneficial for sectors or companies that need time to develop and implement sustainable growth strategies.
Portfolio diversification
Investing in private equity is an effective way to diversify an investment portfolio. Since returns are not highly correlated with those of other assets, such as equities and bonds, this can help reduce the overall risk of a portfolio.
Risks of investing in Private Equity
Although there is potential for medium and long-term appreciation, there are factors involved in investing in private equity that must be carefully evaluated before making an investment decision.
Limited liquidity
Private equity investments are characterised by a long time horizon, during which the invested capital cannot usually be redeemed early. The lack of a liquid secondary market reduces the flexibility of the investment, as investors need to retain capital until the exit.
Dependence on the management team
The success of private equity depends on the correct implementation of defined strategies and the quality of management within invested companies. The performance of the investment may be affected if restructuring, growth or expansion processes do not produce the expected results.
Less diversification
Private equity investments tend to focus on a small number of companies, sectors, or geographical areas. This can increase exposure to specific factors, making the overall outcome more susceptible to adverse events.
Awareness of the economic environment
The performance of unlisted companies can be affected by changes in the macroeconomic environment, financing conditions, and market behaviour. Changes in economic cycles, interest rates or the geopolitical landscape may negatively impact growth and exit opportunities.
Valuation uncertainty
As there is no daily market price for private equity holdings, their valuation is based on models and assumptions. Consequently, the estimated value may differ from the actual value realised when the investment is sold.
How do you invest in Private Equity?
Investing in private equity is a complex process that requires careful consideration. The most common forms are:
Investing in specialist private equity funds
This is the most common way of investing in private equity. Specialist funds are managed by teams of professional investors and pool the capital of multiple investors. To choose this route, you must meet the fund's eligibility criteria and make a usually substantial minimum investment.
Investing directly in companies
This type of private equity investment is suitable for experienced and knowledgeable investors. The process involves researching and identifying potential investment opportunities, conducting detailed analyses of target companies, negotiating investment terms, and committing capital. Therefore, it requires a high degree of ability to actively manage the investment.
Equity co-investment
In some cases, investors may have the opportunity to co-invest alongside a private equity fund in a particular company. While this route can provide greater control over the investment and the ability to take advantage of specific opportunities, it can also require in-depth analysis and particularly careful due diligence.
What precautions do you need to take when investing in Private Equity?
If you are considering investing in private equity, it is important to take certain precautions to make informed decisions and mitigate risk. Key points to consider include:
Careful assessment of opportunities
Conduct a thorough analysis of private equity investment opportunities. Consider the company’s track record, growth potential, sector, proposed investment strategies, management team, and any other relevant factors. Be aware of the risks involved and have a clear understanding of the potential return.
Sector knowledge and experience
Invest in sectors that you understand well. Having experience of the sector or access to industry experts can help you make informed decisions and track company performance over time.
Portfolio diversification
One effective way to reduce the risk associated with any one investment is to diversify your private equity portfolio. Investing in several companies or funds can mitigate the impact of potential losses and increase the likelihood of consistent returns.
Assessment of the private equity manager
When investing in private equity funds, it is important to research the reputation and experience of the fund manager, and the types of companies in which the fund invests. Research the manager's track record, investment strategy, the performance of previous funds, and investor relations. You should also consider the management team and the resources available to support the companies.
Liquidity and investment period
It is important to bear in mind that private equity investments tend to have longer terms, usually implying several years of capital unavailability, and are less liquid than other investments. Before investing in private equity, you should consider your liquidity needs and whether you will be able to hold the investment for an extended period.
Risks and volatility
Investing in private equity carries risk. The companies you invest in may face challenges and uncertainties, and there is no guarantee of a return on your investment. You should be prepared for eventual losses and be aware that returns may fluctuate over time.
Professional advice
Consider seeking professional advice from financial advisers who specialise in private equity. The Banco Carregosa team can provide personalised guidance tailored to your specific situation, helping you to assess the risks and opportunities involved in investing in private equity.
Investing in private equity with Banco Carregosa
If you are considering investing in private equity, the Banco Carregosa team can help you understand the risks and opportunities involved, and develop a sound investment strategy. This will put you in a better position to make informed decisions and maximise your chances of succeeding in the complex and challenging world of private equity. Contact us.
Private Equity: FAQ
You can find the answers to the most frequently asked questions about private equity below.
What is private equity and how does it work?
Private equity involves investing capital in non-publicly traded companies to enhance their value through operational improvements, expansion, or restructuring. After several years, investors typically exit through sales or IPOs, aiming for substantial returns.
What are the advantages of investing in private equity?
Private Equity offers the potential for high returns, access to exclusive opportunities, greater management control, portfolio diversification, and the flexibility to implement long-term strategies.
How can I invest in private equity safely?
Investing in private equity carries risks. To minimise this risk, choose funds managed by experienced professionals, diversify across companies and sectors, evaluate the fund’s track record and strategy, and consult experts such as those at Banco Carregosa for personalised guidance.