Private equity is an important part of the global investment industry, yet it is often less understood than traditional investments such as shares, bonds and property.
When most people think about investing in companies, they think about purchasing shares listed on a stock exchange. An investor might buy shares in a large bank, technology company or consumer brand and become a small shareholder of that publicly listed business.
Private equity operates differently.
Private equity refers broadly to investments in companies or assets that are not publicly traded on a stock exchange.
Instead of purchasing shares through a public market, private equity investors typically invest directly into privately owned businesses, acquire significant stakes in companies or sometimes purchase entire businesses.
The objective is generally to increase the value of those businesses over several years and eventually sell the investment at a higher valuation.
A simplified private equity model looks like this:
Raise Capital → Acquire Businesses → Improve Businesses → Increase Value → Exit Investment → Return Capital and Profits to Investors
Private equity has become a significant asset class for institutional investors, pension funds, sovereign wealth funds, family offices and high-net-worth individuals.
For investors exploring sophisticated wealth-management strategies, understanding how private equity works can therefore be increasingly important.
What Does Private Equity Mean?
The term “private equity” can be broken into two parts.
Private means the investment generally involves a company that is not publicly traded.
Equity represents ownership.
Therefore, private equity essentially means ownership in privately held businesses.
Suppose an entrepreneur owns a successful manufacturing company worth S$20 million.
A private equity firm might offer to purchase 70% of the company for an agreed valuation.
The entrepreneur could receive liquidity while retaining the remaining 30%.
The private equity investor may then work with management to expand the business.
Several years later, perhaps the company has grown significantly and is worth S$50 million.
The private equity investor could then sell its ownership stake.
The difference between the acquisition cost and eventual sale proceeds—after accounting for financing, fees, expenses and other factors—contributes to the investment return.
This is the basic principle behind many private equity investments.
How Is Private Equity Different From Public Equity?
Public equity refers to shares traded on public stock exchanges.
These shares can generally be purchased and sold relatively easily during market hours.
Private equity investments are different.
They are typically:
- Less liquid
- Held for longer periods
- More difficult to value
- Available to a narrower group of investors
- More actively managed
- More concentrated
- More complex
Suppose you purchase S$100,000 worth of shares in a publicly listed company.
If you want to sell those shares tomorrow, there is usually a public market through which you can attempt to do so.
Private equity does not generally offer the same flexibility.
An investor might commit capital to a private equity fund for many years.
There may be no convenient public market where the investment can be sold immediately.
This illiquidity is one of the most important characteristics of private equity.
What Is a Private Equity Firm?
A private equity firm is an investment-management company specialising in private-market investments.
The firm typically raises capital from investors and uses that capital to invest in businesses.
Investors might include:
- Pension funds
- Insurance companies
- Sovereign wealth funds
- Endowments
- Family offices
- Private banks
- High-net-worth individuals
- Other institutional investors
The private equity firm is responsible for identifying potential investments, conducting due diligence, negotiating transactions, monitoring portfolio companies and eventually arranging exits.
Unlike passive investors who simply purchase shares and wait for their value to increase, private equity firms often become actively involved in the businesses they acquire.
How Does a Private Equity Fund Work?
Private equity investments are frequently organised through funds.
Imagine a private equity manager wants to establish a S$1 billion fund.
The manager approaches institutional and qualified investors and asks them to commit capital.
Eventually, investors collectively commit S$1 billion.
The private equity manager then searches for suitable companies to acquire.
The fund might eventually invest in 10 to 20 businesses across several years.
Importantly, investors do not necessarily transfer their entire commitment immediately.
Instead, capital may be requested gradually as investments are identified.
These requests are commonly called capital calls.
For example, an investor might commit S$10 million to a fund.
The fund may initially call S$2 million.
Later, it may request another S$1.5 million.
Over time, the investor contributes capital according to the terms of the fund.
This creates an important liquidity-management requirement for private equity investors.
General Partners and Limited Partners
Private equity funds commonly involve two important groups.
General Partner
The General Partner, often abbreviated as GP, manages the fund.
The GP is responsible for activities such as:
- Finding investments
- Conducting due diligence
- Negotiating acquisitions
- Working with portfolio companies
- Determining when investments should be sold
The private equity firm generally acts as or controls the GP.
Limited Partners
The investors in the fund are generally known as Limited Partners, or LPs.
LPs provide most of the investment capital.
They may include pension funds, family offices, institutions and eligible wealthy investors.
A simplified relationship is therefore:
Limited Partners provide capital → General Partner manages investments → Portfolio companies create value → Investments are sold → Proceeds are distributed
How Does Private Equity Make Money?
Private equity investors generally aim to purchase businesses and eventually sell them at higher values.
There are several ways this can happen.
Revenue Growth
The private equity firm may help a company increase sales.
This could involve entering new markets, launching products, improving marketing or making acquisitions.
Profitability Improvement
Operational improvements may increase profit margins.
The company might improve procurement, technology, productivity or organisational efficiency.
Acquisitions
A private equity-backed company may acquire competitors or complementary businesses.
This is sometimes called a buy-and-build strategy.
For example, a private equity firm might acquire one accounting, healthcare or technology business and subsequently purchase several smaller competitors.
The combined group may become substantially larger and more valuable.
Professionalisation
Some founder-owned businesses have strong products and customers but relatively informal management systems.
Private equity investors may introduce stronger financial reporting, management teams, governance and strategic planning.
Debt Reduction
If an acquisition was financed partly through debt, the company’s cash flow may gradually repay that debt.
As debt declines, the equity value attributable to owners can potentially increase.
Higher Exit Valuation
A company may eventually be sold at a higher valuation multiple if it becomes larger, more profitable, more diversified or strategically attractive.
What Is a Leveraged Buyout?
One of the best-known private equity strategies is the Leveraged Buyout, commonly abbreviated as LBO.
In an LBO, the acquisition is financed using a combination of investor equity and borrowed money.
Consider a simplified example.
A private equity firm acquires a company for S$100 million.
Instead of investing the entire S$100 million itself, the transaction might be financed with:
S$40 million equity
and
S$60 million debt
The acquired company’s cash flow may subsequently be used to service and reduce the debt.
Suppose several years later the company is worth S$150 million and outstanding debt has fallen to S$30 million.
The equity value would theoretically be approximately:
S$150 million − S$30 million = S$120 million
The investors originally contributed S$40 million of equity.
Their equity has therefore potentially increased substantially.
This simplified example demonstrates how leverage can enhance private equity returns.
However, leverage also increases risk.
If the company’s performance deteriorates, debt obligations still need to be serviced.
Excessive leverage can therefore create serious financial problems.
Private Equity Versus Venture Capital
Private equity and venture capital are related but different.
Venture capital typically invests in younger, high-growth companies.
These businesses may still be developing their products, markets or business models.
Private equity, particularly buyout private equity, more commonly invests in established companies with existing revenue and cash flow.
A simplified comparison might be:
Venture Capital: Early-stage company → High growth potential → High uncertainty
Private Equity: Established company → Operational improvement and expansion → Eventual exit
However, the private-market investment industry contains many strategies, and the boundaries can sometimes overlap.
Growth Equity
Growth equity sits somewhere between traditional venture capital and buyout private equity.
A growth-equity investor typically invests in established companies that are already growing rapidly.
The company may not need a complete change of ownership.
Instead, it may require capital to:
Expand internationally,
develop new products,
hire employees,
acquire competitors,
or increase production capacity.
The investor may purchase a minority stake rather than acquiring the entire company.
Growth equity can therefore provide entrepreneurs with capital while allowing founders to retain significant ownership.
Why Do Business Owners Sell to Private Equity?
Entrepreneurs sell stakes in their companies for many reasons.
One major reason is liquidity.
Imagine an entrepreneur has spent 20 years building a business worth S$30 million.
Almost the entire personal fortune may be represented by that company.
Selling 60% of the business to a private equity investor could allow the entrepreneur to convert part of that business wealth into liquid personal wealth.
Another reason is growth.
A private equity partner may provide:
- Additional capital
- Management expertise
- Acquisition experience
- International networks
- Strategic guidance
- Professional governance
The entrepreneur might therefore believe the business can become substantially larger with an institutional partner.
The Second Bite of the Apple
Private equity transactions sometimes allow founders to retain a minority ownership interest after selling control.
This can create what is sometimes described as a second bite of the apple.
Imagine an entrepreneur owns 100% of a company worth S$20 million.
The entrepreneur sells 70% but retains 30%.
After working with the private equity firm for several years, the company grows and is eventually sold for S$60 million.
The founder’s remaining 30% could theoretically be worth S$18 million before considering transaction structures, dilution, taxes and other factors.
The entrepreneur therefore receives liquidity during the first transaction while retaining exposure to future growth.
Of course, future growth is never guaranteed.
How Long Do Private Equity Firms Hold Companies?
Private equity is generally a long-term investment strategy.
A private equity firm may hold a portfolio company for several years before attempting an exit.
During this period, the objective is to improve the business sufficiently to generate an attractive return.
Private equity should therefore not be viewed like short-term stock trading.
The investor is typically making a multi-year commitment.
The same applies to investors in private equity funds.
Capital can remain tied up for many years.
How Does a Private Equity Firm Exit?
Eventually, the private equity investor generally wants to realise the value created.
There are several potential exit routes.
Sale to Another Company
A strategic buyer may acquire the business.
For example, a larger competitor may want the company’s customers, technology or market presence.
Sale to Another Private Equity Firm
One private equity investor may sell the business to another private equity fund.
This is commonly called a secondary buyout.
Initial Public Offering
Some private equity-backed companies eventually list on a stock exchange through an IPO.
Sale Back to Management or Founders
In certain situations, management or the original owners may repurchase the investor’s stake.
The appropriate exit depends on market conditions and the company’s circumstances.
How Do Private Equity Firms Earn Fees?
Private equity managers generally receive compensation through management fees and performance-related economics.
A fund may charge an annual management fee based on committed or invested capital, depending on the fund’s structure and stage.
The manager may also receive a percentage of investment profits after satisfying relevant contractual terms.
This performance participation is commonly known as carried interest or simply carry.
The precise structure varies considerably between funds.
Investors should therefore understand the complete fee structure before committing capital.
What Is Carried Interest?
Carried interest is the private equity manager’s share of investment profits under the fund’s agreed terms.
For example, suppose a fund generates substantial profits after returning capital to investors and satisfying any applicable hurdle or preferred-return provisions.
A portion of additional profits may then be allocated to the private equity manager.
This creates an incentive for the manager to generate strong investment returns.
However, private equity fund economics can be complicated, with provisions involving hurdles, waterfalls, clawbacks and other arrangements.
Professional advice may therefore be appropriate when evaluating significant private-market investments.
Private Equity and Wealth Management
Private equity can form part of a sophisticated wealth-management portfolio.
Traditional portfolios may contain:
Cash + Bonds + Public Equities
More diversified high-net-worth portfolios might also include:
Property + Private Equity + Private Credit + Other Alternative Investments
Private equity can potentially provide exposure to companies and opportunities that are unavailable through public stock exchanges.
However, it also introduces additional risks and complexity.
It should therefore not automatically be considered superior to public-market investing.
Private Equity and AUM
Private equity funds can manage very large amounts of capital.
If a private equity firm manages several funds containing a combined US$50 billion, it might be described as having approximately US$50 billion in assets under management, depending on the methodology used.
AUM is important because it indicates the scale of the investment organisation.
However:
Higher AUM does not automatically mean better investment performance.
A smaller specialist manager might generate excellent results, while a large manager can still make poor investments.
Investors should evaluate much more than the size of a fund manager.
What Are the Potential Advantages of Private Equity?
Private equity can offer several potential benefits.
One is access to private businesses that are unavailable through public stock exchanges.
Another is the ability of the investment manager to actively influence portfolio companies.
Private equity may also provide diversification from traditional public-market investments.
Successful managers can potentially create substantial value through operational improvements and business growth.
However, these advantages need to be considered alongside significant risks.
What Are the Risks of Private Equity?
Private equity investments involve several important risks.
Illiquidity
Money may be committed for many years.
Investors generally cannot simply sell whenever they want.
Business Risk
Portfolio companies can perform poorly or fail.
Leverage Risk
Some transactions use substantial debt.
This can magnify losses.
Valuation Risk
Private companies do not have continuously quoted market prices.
Valuations can therefore involve estimates and assumptions.
Manager Risk
Investment outcomes can depend heavily on the private equity manager’s ability to select, manage and exit investments.
Concentration Risk
Private equity portfolios may contain fewer investments than highly diversified public-market funds.
Timing Risk
Economic conditions when investments are acquired and eventually sold can materially influence returns.
Who Invests in Private Equity?
Historically, private equity has primarily been an institutional investment category.
Investors include pension funds, sovereign wealth funds, insurance companies, endowments and other major institutions.
High-net-worth individuals and family offices may also allocate part of their portfolios to private equity.
However, private equity is not appropriate for everyone.
Investors generally need sufficient liquidity elsewhere because capital may be inaccessible for long periods.
They also need the financial ability to absorb potential losses.
Private Equity in Singapore
Singapore has become an important centre for private capital and wealth management in Asia.
Its financial ecosystem includes private equity firms, venture capital managers, private banks, family offices, professional advisers and institutional investors.
For high-net-worth families using Singapore as a wealth-management centre, private equity may form one component of a broader investment strategy.
Singapore entrepreneurs may also encounter private equity from the opposite perspective—not as investors, but as business owners seeking capital, succession solutions or potential buyers for their companies.
This makes private equity relevant to both sides of wealth creation:
Investors seeking returns
and
Entrepreneurs seeking capital or liquidity.
Private Equity and the Entrepreneur’s Wealth Journey
Private equity can play an especially interesting role in the financial journey of an entrepreneur.
The process might begin with:
Start Business → Grow Business → Increase Profits → Increase Business Value
Eventually, the founder may bring in private equity.
The journey could then become:
Private Equity Investment → Partial Business Sale → Personal Liquidity → Diversification
The entrepreneur might subsequently invest the proceeds through a wealth-management or private-banking relationship.
Therefore, private equity can sometimes represent the bridge between business wealth and personal financial wealth.
A founder may spend decades building wealth inside one company.
A private equity transaction can convert part of that concentrated business ownership into liquid capital that can subsequently be diversified.
Private Equity Versus Public Equities for Wealthy Investors
Private and public equity can serve different roles.
Public equities generally provide:
Greater liquidity,
transparent market pricing,
easy diversification,
and relatively straightforward access.
Private equity generally provides:
Access to private companies,
potential operational involvement,
longer investment horizons,
and different return opportunities.
A sophisticated portfolio does not necessarily need to choose one or the other.
Some investors use both.
The appropriate allocation depends on factors such as wealth level, investment objectives, liquidity requirements, time horizon and tolerance for risk.
Private Equity Is Not Guaranteed to Produce Higher Returns
One misconception is that private investments must automatically be better than public investments because they are more exclusive.
That is not true.
Private equity investments can lose money.
Companies can fail.
Acquisitions can be overpriced.
Debt can become unsustainable.
Economic conditions can deteriorate.
Exit opportunities can disappear.
Investment managers can make poor decisions.
Therefore, investors should not confuse exclusivity with quality.
Private equity may offer attractive opportunities, but appropriate due diligence remains essential.
Understanding Private Equity Within Wealth Management
Private equity becomes easier to understand when placed within the broader wealth-management landscape.
A person’s financial journey might look like:
Earn Income → Save → Invest → Accumulate Wealth → Diversify Investments → Access Private Markets → Preserve Wealth → Transfer Wealth
During the early stages of wealth accumulation, investors may primarily use cash, public equities, bonds and property.
As wealth becomes more substantial, investors may consider additional asset classes.
These can include:
Private equity,
private credit,
venture capital,
hedge funds,
and other alternative investments.
The objective is not necessarily to make the portfolio more complicated.
The objective should be to construct a portfolio appropriate for the investor’s financial goals, liquidity requirements and risk tolerance.
Conclusion
So, what is private equity?
Private equity is broadly the investment of capital into businesses that are not publicly traded on a stock exchange.
Private equity firms raise money from investors, identify businesses to acquire or invest in, work to increase their value and eventually attempt to sell those investments for a profit.
The basic model can be summarised as:
Raise Capital → Invest in Companies → Improve Businesses → Grow Value → Exit → Return Capital and Profits
For entrepreneurs, private equity can provide growth capital, strategic expertise and an opportunity to convert part of their business ownership into personal liquidity.
For investors, private equity can provide exposure to businesses and investment opportunities outside public stock markets.
However, private equity involves important trade-offs.
Capital may be locked up for years.
Valuations are less transparent.
Leverage may increase risk.
Investment outcomes depend heavily on manager quality.
And there is no guarantee that private equity will outperform traditional investments.
For high-net-worth individuals, private equity can potentially form one component of a diversified wealth-management strategy, alongside public equities, bonds, cash, property and other investments.
Ultimately, private equity represents another stage in the relationship between entrepreneurship, investment and wealth creation.
An entrepreneur may create wealth by building a private company.
A private equity investor may provide capital to help that company expand.
The entrepreneur may eventually sell part or all of the business.
And the resulting liquidity may then be diversified into a broader investment portfolio.
In this sense, private equity sits at an important intersection between business ownership, investment management and long-term wealth creation.