This is general information, not investment advice.

A handful of firms most people couldn't name now own companies most people use every week. Here's the model behind them.

What private equity is

Private equity (PE) firms raise pools of capital, use it to buy companies — usually private ones, or public companies they take private — try to make them more valuable, then sell them, typically within three to seven years. The biggest names — Blackstone, KKR, Apollo, Carlyle — each manage hundreds of billions of dollars; Blackstone alone reported over $1.3 trillion in assets. Global PE assets run to roughly $5 trillion-plus, part of a wider private-markets world.

The structure: GPs and LPs

A PE firm mostly invests other people's money. It raises a fund and collects commitments from limited partners (LPs) — pension funds, endowments, sovereign wealth funds, wealthy individuals — who provide the capital, take no management role, and can't lose more than they commit. The firm is the general partner (GP) that runs the deals and usually invests a few percent of its own money alongside. Capital is drawn down over time via capital calls as deals close.

The leveraged buyout

The signature PE deal is the leveraged buyout (LBO): buying a company with a mix of the fund's equity and a large amount of borrowed money — often 60–70% debt — loaded onto the acquired company, with its assets and cash flows as collateral. Leverage amplifies returns: put in $300M of equity, borrow $700M to buy a $1bn company, sell for $1.5bn, and the equity stake more than doubles even though the company's value rose just 50%. The math cuts both ways — if cash flow weakens and the debt can't be serviced, the equity can be wiped out. That's why PE targets tend to be mature, steady, cash-generative businesses.

How firms get paid: "2 and 20"

PE earns money two ways. A management fee (~2% a year of capital) covers operations regardless of performance. Carried interest (the "20") is 20% of profits above a hurdle rate (often 8%) — the main way partners get rich. Carry is taxed at the long-term capital-gains rate (max 20%) rather than ordinary income (up to 37%) if holdings exceed three years — a treatment critics call a loophole and the CBO estimates closing would raise about $12 billion over a decade.

How PE tries to add value

After buying, the GP works to raise value before exiting (a sale or IPO): operational improvements and cost cuts, add-on acquisitions ("buy and build"), revenue growth, and refinancing debt. Exits have been hard lately, though — Bain & Company found distributions to LPs fell to just 11% of fund value in 2024 (vs a ~29% norm), leaving a record $3.6 trillion of unsold companies.

The criticisms

The model draws sustained fire. Toys R Us is the emblem: a 2005 LBO by KKR, Bain Capital and Vornado saddled it with $5 billion in debt; unable to invest while servicing it, the chain liquidated in 2018, costing 33,000 jobs. Critics point to crushing debt loads, dividend recapitalizations (borrowing to pay the fund a dividend), asset stripping, and layoffs. PE's push into healthcare ($104bn of US deals in 2024) has drawn particular scrutiny over costs and staffing, prompting new state notification laws.

PE vs. VC vs. hedge funds

They're often confused. Venture capital funds young startups for minority stakes, no leverage. Private equity buys mature companies, usually for control, often with debt. Hedge funds trade liquid public securities with varied strategies. PE has also expanded into private credit — lending directly to companies — and is increasingly marketing to retail investors, a "democratization" that broadens access but exposes ordinary savers to illiquid, complex products.

What it means

For investors, PE has historically delivered strong long-run returns, but with illiquidity (capital locked up a decade) and high minimums. For companies and workers, outcomes vary widely: capital and expertise in some cases, crushing debt and cost-cutting in others. The debt-driven, time-limited model creates incentives that don't always align with long-term stability — which is why the industry is admired and criticized in roughly equal measure.