Private equity.
In plain English
Private equity (PE) firms raise pools of capital from institutional investors and accredited individuals, then use that capital plus large amounts of borrowed money to buy entire private companies (or take public companies private). The PE firm holds the company for typically 4 to 7 years, attempts to grow earnings or restructure operations, then exits via sale to another firm, sale to a strategic acquirer, or IPO. Fees mirror hedge funds: typically 2% of committed capital per year plus 20% of profits above a hurdle rate.
01Why it matters
Private equity has been one of the best-performing institutional asset classes since the 1980s, though performance dispersion across funds is wide and capital is locked up for a decade or more. For retail investors, direct PE access is essentially impossible; the closest substitutes are publicly traded PE firms (KKR, Blackstone, Apollo) or 'access funds' that bundle PE exposure for high-net-worth individuals at additional fee layers.
02The math, step by step
The 2007 buyout of TXU (the Texas utility) by a consortium of KKR, TPG, and Goldman Sachs Capital Partners was a $48 billion deal financed with about $40 billion of debt. It ended in 2014 with the company filing for bankruptcy, the largest private-equity buyout failure in U.S. history. Other KKR deals over the same decade produced multi-billion-dollar gains. PE returns are made in the wins; the losses are absorbed within the fund.