Private equity as a key pillar of a functioning private sector

Private equity encompasses investments in all companies that are not listed on a stock exchange. This makes it the largest and, at the same time, the most dynamic asset class on the market. It encompasses a range of different investment strategies, each tailored to the specific development stages of privately held companies. Private equity thus provides companies with financing solutions that are suited to their respective growth phase.

The focus is usually on the following areas:

Venture Capital

Venture capital involves investing in companies in earlier growth phases. Young and high-growth companies (start-ups) in particular require equity capital to develop products, establish sales channels or build up their workforce.

Growth Equity

Growth equity focuses on companies that require further capital for expansion or future growth. Companies at this stage have often already demonstrated that their business model works. The capital is therefore channelled into accelerating clearly defined growth plans. These companies are frequently already profitable or on the verge of becoming so.

Buyouts

Buyouts target mature, established companies with stable cash flows and a solid market position. At this stage of a company’s development, investors typically acquire a majority stake and work closely with management to unlock potential and implement strategic realignments.

Private equity investments are usually held in the portfolio for several years. The shares are sold after the investor’s individual holding period to realise the capital appreciation. The long-term focus of this investment strategy can result in attractive risk-return profiles for investors.

An effective way to capitalise on growth opportunities and the dynamics of the wider economy

Private equity offers numerous advantages over liquid markets (i.e. the stock market):

More options

In the US alone, there are 420 times as many privately held companies as listed companies[1]. Private equity thus offers investors access to a vast investment universe and enables equity investments across the broader real economy, whereas, particularly in the US, the stock markets are dominated by a handful of technology companies.

Potential for attractive returns

Private equity managers are actively involved in optimising the structures and growth strategies of portfolio companies. The added value generated by this involvement has the potential to lead to better returns.

Long-term approach

The focus is clearly on a long-term strategy. Private equity managers are not subject to the pressure that shapes day-to-day trading in daily-traded shares and bonds. This enables them to devote themselves fully to the development of their portfolio companies over several years and to promote sustainable growth through active management.

Private equity offers significant potential and is less susceptible to fluctuating market sentiment or other short-term events. As such, this asset class provides stability and has a positive impact on portfolio efficiency. However, as with other asset classes such as equities or bonds, it is important to bear in mind that private equity investments can also suffer price losses.

Private equity holds long-term potential

Source: McKinsey & Company, “Global Private Markets Report 2025: Private equity emerging from the fog.”

From high-performing portfolio companies and future market leaders

When building a private equity portfolio, the quality of the deal flow is crucial. Only those who have good sources for promising companies and can reliably secure high-quality new additions will achieve long-term success.

A thorough review (known as due diligence) of individual projects ensures that the companies possess the key characteristics and that no obstacles stand in the way of a potential investment. Less is often more – up to 98 per cent of projects that undergo due diligence are rejected. Only those companies where an investment appears promising remain.

Private equity managers act as co-owners of a company. From the very first day of the investment, they support and initiate strategic and/or operational improvements within the company that positively influence growth and steer the company in the desired direction. With expertise, access to further equity capital and the necessary foresight, they ultimately steer the company together towards greater value creation and, ultimately, an exit.

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[1] Public companies in the U.S.: Number of firms listed on the stock exchange, as of 2022: The Global Economy – USA: Listed Companies. Private companies in the U.S.: Number of private sector firms with 50 employees or more, as of 2023: KFF – Number of Private Sector Firms. Listed public companies in the U.S. as defined by Worldbank.org as of 2023.

 

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