Set out the stages at which private equity invests and the ways it exits
The idea
Private equity buys businesses that are not publicly traded, and the two main forms differ in where the return comes from. Venture capital funds young companies where most investments fail and a few pay for everything. Leveraged buyouts acquire mature, cash-generative businesses using substantial debt, and return comes from operational improvement, debt repayment and multiple expansion. Capital is drawn down over time rather than invested at once, which is why early reported returns are usually negative — the J-curve, driven by fees charged before value is created. Exit is the point of the exercise: a trade sale, a secondary sale to another fund, a public offering or a recapitalisation, or failing those a write-off, and until then gains exist only on paper.
A practice question
Venture capital typically invests in companies that are:
- young and unproven — correct
- mature and cash-generativeWhy not: The buyout target profile, which can support the debt a leveraged purchase requires.
- publicly listedWhy not: Venture capital invests before a listing; a listing is one of the exits.
The economics assume most investments fail and a small number pay for the entire portfolio.
A harder one
Private equity capital is typically provided by investors as:
- a single upfront paymentWhy not: Capital sits with the investor until called, which is what creates the liquidity planning problem.
- commitments drawn down over time — correct
- a listed securityWhy not: Fund interests are private and transferable only through a secondary sale.
Capital is called when deals are found, which is why committed and invested capital are different figures.
The hardest tier
Reported private equity volatility is often understated because valuations are:
- marked to market dailyWhy not: Daily marking is exactly what would reveal the volatility; private funds do not do it.
- audited annuallyWhy not: An audit checks the valuation process rather than changing how often values move.
- appraisal-based and infrequent — correct
Smoothing from stale marks suppresses measured volatility and correlation without reducing any actual risk.
In the app: 18 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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