Private Equity

How private equity works

The term is simply the opposite of public equity. Instead of buying shares that trade on an exchange, private equity investors own businesses privately, with no daily price and no easy way out. The family also includes venture capital, which backs young companies, but the core of the industry is the buyout: a fund acquires a mature business, typically financing a large part of the price with debt placed on the company itself.

The fund then spends years trying to make the business more valuable: cutting costs, changing management, expanding into new markets, or merging it with other companies. The exit is the whole point. After a holding period that commonly runs five years or more, the company is sold to another buyer, to another private equity firm, or to the public markets through an IPO. The profit, if any, is the difference between the price going in and the price coming out, amplified by the borrowed money used for the purchase.

The trade-offs

The first is illiquidity. Private equity funds typically lock up investor money for around a decade, drawing capital in the early years and returning it as companies are sold. There is little liquidity along the way; selling a fund stake early usually means finding a specialized buyer and accepting a discount.

The second is dispersion. In public markets, most funds end up clustered near the index. In private equity, the gap between the best funds and the worst is unusually wide, so the choice of manager tends to matter more than the decision to invest in the asset class at all. Unhelpfully, the top funds are also the hardest to get into.

Add high minimum commitments and layered fees, including a management fee plus a share of profits, and it becomes clear why this is built for institutions rather than households.

You probably already own some

Here is the reassuring part: most working Canadians already have private equity exposure without ever signing a subscription agreement. Canada's large pension plans, including the fund that invests CPP contributions and the major Ontario and Quebec public-sector plans, rank among the biggest private equity investors in the world. If you contribute to CPP or belong to a large workplace pension, a slice of your retirement money is very likely working inside privately held companies around the globe.

Retail access is creeping in

Fund structures aimed at individual investors, such as interval funds with periodic redemption windows, have started to package private equity for smaller accounts. Approach these with clear eyes: fees are typically high, redemption rights are limited by design, and a fund that promises easy exits from hard-to-sell assets is making a promise worth examining closely.