Operating Structure: PE firms raise capital from investors (limited partners) and invest in companies, often acquiring controlling stakes to drive growth and improve efficiency. The firm exits the investment after increasing the company's value.

Sourcing Deals: PE firms find deals through industry networks, proprietary research, or auctions. They often specialize in specific sectors to identify companies with potential for growth or improvement.

Structuring Investments: Investments are usually a mix of equity and debt (leveraged buyout), where the company takes on debt to enhance returns. PE firms may take full control or minority stakes in growth equity deals.

Value Creation: PE firms drive value by improving operations, growing strategically, optimizing capital structures, and selling at higher valuations.

Compared to public markets, PE investments are longer-term, more hands-on, and often use debt financing. Unlike venture capital, which focuses on early-stage companies, PE typically targets mature firms.

Private equity plays a crucial role in driving growth while offering high-risk, high-reward opportunities for investors.

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Think of them like a few steps further along than VC’s. Typically VC’s are buying potential and emerging businesses. More often than not PE are buying established business.

The PE firms employees create a value thesis for a certain vertical. They create a “fund” to allocate capital towards an investment thesis. Within the fund they are the general partner responsible for making investments. They also put up their own money. For the rest of the money in the fund, they raise money from those investment sources (family offices etc.) and they are known as limited partners. A single firm can operate one or many funds depending on size and investment strategy.

So a Firm, starts a fund comprising of itself as a General partner, and fundraise from limited partners.

The firm then looks for investment opportunities with a 3-10 year horizon to exit. So they basically buy a bunch of companies that match their investment thesis, improve them in some way or extract value from them and then sell the results to either another fund or to a private source or eventually IPO.

In the pre-purchase phase the firm is assessing investment opportunities and doing their due dilligence to decide if the target company is a good buy or not, they’re also working with banks to structure the capital needed for purchase and fundraising with the limited partners.

Post acquisition the purchased company is now a “portfolio company” and Firm appointed management team is responsible for executing the value creation plan they set out in their investment thesis. If the existing management were good they could be the same people as pre acquisition or they could be entirely new.

Lets look at an example.

Say within a given US state there are several dentists. Each one alone is run by the practicing dentists and they have to pay for all of their supplies.

A private equity fund thinks they can run the business parts of this better. They buy 10 dental practices and now they can negotiate bulk with providers. They can centralise the business process and software and auxiliary staff. Now it only costs 7 dental practices worth of capital to effectively run 10 practices via synergies from being able to centralise a bunch of systems and negotiate in bulk.

Later they sell the entire dentistry group for a profit.

That’s the basic idea, there are obviously nuances at every step.