Private Equity (PE) Basics — Investing in Unlisted Stakes

Private equity (PE) is a fund that invests in 'stakes in unlisted companies.' Unlike the listed stocks we buy on a brokerage app, it buys shares of companies that aren't traded on the market.

A representative approach is the buyout. It acquires a mature company outright, along with management control, then over several years lifts the company's value (cost cutting, business restructuring, growth investment, etc.), and later resells it at a higher price or takes it public to book the gain. In this process, a large portion of the acquisition funds is often raised with debt, which is called a leveraged buyout (LBO).

In other words, private equity aims for returns through 'buy cheap, make it better, then sell expensive.' That said, the process takes place over several years, and not just anyone can participate.

A private equity fund is usually made up of two kinds of participants.

GP (General Partner): The professional management firm that runs the fund. It decides which companies to acquire and how to raise their value.

LP (Limited Partner): The investors who supply the capital. Most are pension funds, university endowments, insurers, and high-net-worth individuals. LPs first make an investment commitment, and put in money in installments each time the GP does an actual deal (a capital call).

The fee structure is often summarized as '2 and 20.' Each year the firm takes about 2% of committed capital as a management fee (regardless of performance), and when profits exceed a certain hurdle (usually 8%), it takes 20% of the excess profit as a performance fee (a success fee).

That said, recently, as competition has intensified, management fees have been trending lower; the average management fee for 2025 buyout funds came down to about 1.61%, below the past 2%.

The biggest feature and risk of private equity is that 'money is tied up for a long time.'

Usually capital is locked up for 7–10 years (up to 12 years), so you can't withdraw it freely in the meantime. There is a secondary market where you can sell midway, but you generally have to hand it over at a discount.

Another concept to know is the J-curve. In the early years, private equity spends money acquiring and improving companies, and fees also drain out, so the return often starts out negative. Then in the later phase, as the invested companies are resold and returns are recovered, the curve bends upward. This shape resembles the letter J, hence 'J-curve.'

So private equity presupposes 'patient capital that can endure years of negatives and illiquidity.'

Private equity is often promoted with 'high returns.' But when you look at that number, you have to watch out for two things.

First, performance dispersion is severe. Depending on which manager you chose, the result is night and day. The gap in 10-year return (IRR) between the best and worst managers can exceed 50 percentage points. That is, 'the private equity average is good' does not mean 'the fund I chose is good.' A median-level fund can even underperform the index.

Second, survivorship and reporting bias. Funds that failed and disappeared tend to drop out of the statistics, and private equity has the characteristic that its price is not set by the market but calculated by self-valuation (NAV), so performance can look better than reality.

Ultimately, private equity is an area where you must be especially wary of the 'trap of averages.' You must account for the high fees, long lock-up, and large dispersion all together to see the real picture.