A pension fund commits $50 million to a private equity fund in 2026. The cash leaves slowly, returns trickle back over a decade, and there is no public price quote on Tuesdays. That is private capital.
Private equity is ownership in companies whose shares do not trade on a public exchange. Capital is locked up in a fund (limited partnership) that the general partner (GP) deploys over a multi-year investment period. Limited partners (LPs) commit capital up front but do not write checks until the GP issues capital calls. Distributions return when portfolio companies are sold or recapitalized. Total fund life is typically 10 to 12 years.
KEY: The J-curve. Early-year returns look negative because fees and write-downs hit before exits generate proceeds. Performance turns positive only as portfolio companies mature and exit.
Leveraged buyouts (LBOs). A GP buys a mature company using a small slice of equity and a large slice of debt (typically 60-80% debt). Targets are companies with stable cash flows, hard assets, and capacity to service debt.
Common mistakes
- Treating IRR as a time-weighted return. Private equity IRR is money-weighted and depends on the timing of capital calls and distributions. Comparing it directly to a public index total return is misleading. Use PME for honest benchmarks.
- Assuming low reported correlation equals low true correlation. Quarterly appraisals smooth volatility and depress measured correlations. Trap: "private equity correlation with public equity is 0.5, so it diversifies a 50% public equity allocation almost completely."
- Confusing committed capital with invested capital. LPs pay management fees on committed capital from day one, even before a single dollar is called. The denominator for fee calculations is bigger than the deployed base.
Bottom line
- Private equity = LBO + venture capital + growth equity. Long lock-ups (10-12 yr), J-curve, illiquidity premium.
- Private debt = direct lending, mezzanine, distressed, venture debt, infrastructure debt, specialty finance. Floating rate, senior secured most common; direct lending dominates by AUM.
- LBO targets stable cash flows with 60-80% debt; VC targets early-stage growth with high failure rate; growth equity takes expansion-stage minority stakes.
- Diversification comes from low public-market correlation, not zero risk. Reported correlations are biased low by stale appraisals.
Exam shortcut
LBO vs VC quick test: mature + leveraged + control = LBO; early-stage + minority + no leverage = VC. Private debt default position: senior secured floating rate (direct lending) is the base case. Mezzanine is the exception. Diversification claim test: if a question says "private capital is uncorrelated with public markets," it is probably wrong, low correlation, not zero, and partly a smoothing artifact.
The full lesson (about 2,510 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- private capital equity and debt
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