Types of Private Equity
Private Equity is best known for targeting later stage private companies. These businesses are typically profitable with high recurring revenues. As these businesses are more established, they tend to have a lower risk profile compared to investing in start-ups or younger companies with little or no track record. That said, all investment in private companies should be considered high risk.
Buyouts are the most common corporate transactions favoured by private equity firms. This is where they enable experienced management teams to gain ownership in the businesses they run, acquiring a majority or controlling stake. The objective is to enhance value by supporting growth initiatives such as international expansion, buy and build strategies, operational improvements and professionalising the business, with the ultimate aim of becoming attractive to prospective trade or financial buyers. A leveraged buyout is the same financial transaction, but the buyout is primarily done using borrowed funds reducing the amount of upfront investor capital required to complete the investment.
A rapidly emerging segment of the private equity industry is growth investing, in fact growth and venture assets under management have increased at twice the rate of traditional buyout structures in recent years. The development of this area has been primarily driven by the rapid pace of technological innovation which are disrupting traditional markets or creating new opportunities in high growth sectors such as AI, biotech, fintech, and software.
Growth Capital is typically used to acquire a minority share in a fast growing business that has moved beyond the start-up stage and is quickly scaling - winning new clients or increasing revenues for example. The capital is geared towards businesses that are either profitable, close to profitability, or have revenues which are growing quickly. Growth capital is typically used to fund a transformational event in the lifecycle of a business such as entering new markets, expanding their operations and infrastructure, developing new technologies or making a strategic acquisition.
Venture Capital is a form of private equity financing aimed at start-ups and earlier stage businesses. These businesses are rarely profitable and often pre-revenue, but what these businesses do have is the potential for rapid growth. Backable businesses are often disruptors, innovators and developing novel technologies. Venture capital funding is predominately used to scale and commercialise a company’s product or service, and often when a business does receive VC backing this can enhance its credibility and market perception.
The Increasing Interest in Private Equity
Businesses are increasingly looking towards private equity as a solution to the challenges they face accessing traditional financing. Data from The British Private Equity & Venture Capital Association (BVCA) reported that UK businesses received £20.1 billion of investment in 2023.
Beyond capital, private equity firms bring expertise, strategic insight and operational support, and the funding is becoming an increasingly attractive option for ambitious businesses looking to scale. In a report compiled by the Private Equity Reporting Group it found that private equity backed businesses continue to outperform public companies, highlighting a clear pathway to growth and enhanced competitiveness.
Companies are also staying private for longer, with research by Statista showing that the number of companies trading on the London Stock Exchange has fallen from nearly 2,500 in 2015 to under 1,800 in 2024. As more companies turn to the private markets for the capital and expertise they need to grow, private equity is not only playing an increasingly important role in driving economic growth but is also presenting new investment opportunities.
Source: Statista, 2025
For the investor, the increased appeal of private equity is largely driven by its potential to enhance portfolio returns, with investors looking to the alternative asset classes as a means to reduce the impact of diminishing returns from the more traditional asset classes. According to the BVCA’s annual Performance Measurement Survey, which reports on the aggregated performance of all independent UK venture capital and private equity funds managed by BVCA members, private capital generated an average 10-year return of 17% vs the 6.5% achieved by the FTSE All Share Index.
Source: BVCA Performance Measurement Survey 2022.
Whilst the traditional asset classes should still form the cornerstone of a well-diversified and robust portfolio, investors are now more aware of the need to create an allocation to alternative assets to enhance risk adjusted returns, increase diversification and reduce risk. As such, private equity is becoming widely recognised as an established asset class.
As a result, many private investors and family offices are redesigning their asset allocations to add or increase exposure to alternatives such as private equity. This is evidenced by the 2023 UBS Global Family Office Report, highlighting that 41% of family offices are planning to increase their allocation to direct private equity investments over the next five years.
Why Invest in Private Equity?
The investment universe is more diverse than ever. Investors now have access to a broader range of asset classes, investment strategies, and structures. This expanded choice, combined with improved accessibility, provides greater opportunities to construct diversified portfolios with the potential for enhanced risk-adjusted returns.
According to Preqin, all alternative asset classes will see significant growth in global AUM in the coming years, with private equity forecast to double by the end of 2029, up from 2023, from $5.80 tn to $11.97 tn. Having been largely the preserve of institutional capital until recent years, private equity has become an increasingly popular investment option for more experienced investors, in part due to barriers to entry being eased, but also because more wealth managers and financial advisors are now more knowledgeable around the structures of alternative investments, particularly illiquidity, and how they can feature in their clients’ portfolios. Research conducted by CAIS and Mercer has found that nine in ten currently incorporate alternative investments in client portfolios and 91% plan to increase allocations further over the next two years.
Source: Preqin, Future of Alternatives 2029 Report.
Investing in private equity is primarily done through two routes. The most common is through a private equity fund managed by a professional investment manager. The investors in the fund become Limited Partners (LP), whilst the responsibility for sourcing, managing and exiting the investments, as well as all administration is undertaken by the investment manager who serves as the General Partner (GP). Investors commit capital into a fund with a pre-defined strategy prior to any investments being made, and typically with fixed lifespan of between 10 to 12 years.
An alternative, and increasingly popular route, is through a deal-by-deal private equity structure, where investors construct their own bespoke portfolio on a self select basis rather than a pooled fund. This offers investors a more transparent and controlled way to align their investment choices with their risk tolerance and investment objectives. This approach enables investors to get direct exposure to highly curated private company investment opportunities alongside seasoned private equity firms.
Managing a multi-asset investment approach with exposure to private equity, means striking a balance between investing over the long term, where you are essentially locking in capital, while ensuring you have sufficient liquidity for any near term requirements. The prospect of higher potential returns and the strategic benefits of diversification beyond traditional investments are an attractive advantage, however, private equity is typically only suitable for experienced investors with an appetite and capacity for risk, and who have the resources to bear any loss that may result from such investments.
For more information you can check out our guide to investing in private equity.