When we talk about investment, we often think of stocks, bonds, or even real estate. But there’s a more exclusive world, reserved for large fortunes and institutional investors, that moves billions and generates high returns (though not without risk): private equity.

Today we’re diving into what private equity is, how it works, what sets it apart from other forms of investment, and why it may (or may not) be a good fit for you. We’re not going to stay on the surface. We’ll go deep. So, if you’ve ever been curious or are thinking about diversifying your portfolio, this article is going to interest you. A lot.

Definition of Private Equity: Alternative Investment Accessible to Major Capital

Private equity is a form of private financing where funds acquire stakes in non-listed companies (that is, companies not on the stock market), with the goal of improving them, growing them, and later selling them at a higher value.

Sounds simple, right? But behind it lies a complex, selective, and deeply strategic process. Private equity funds invest large amounts of money, usually in companies with strong potential but that need a push—new management, international expansion, digital transformation… whatever it takes to boost their value.

What’s interesting (and also exclusive) is that not just any investor can participate. We’re talking about minimum investments in the millions of euros, although there are co-investment vehicles that allow access to more modest capital. But still, it’s an illiquid investment with high risk.

How Private Equity Funds Operate: Common Phases and Strategies

A private equity fund typically follows a standard path, although each case is unique. Here's a summary of the main phases:

1. Fundraising: Fund managers raise capital from qualified investors, with contributions being made over time.

2. Target company selection: This is where the magic—or the art—happens. They look for businesses with growth potential, room for improvement, or in key sectors.

3. Acquisition: The fund acquires a stake, often gaining full or majority control.

4. Active management: Improvements are made, strategy shifts, processes optimized… All to grow the business and increase its value.

5. Exit: The company is sold, taken public, or merged. That’s when investors (hopefully) recover and multiply their money.

Typical strategies include:

• Buyouts (full or majority takeovers)

• Growth equity (capital to expand already-profitable businesses)

• Turnarounds (rescuing and reviving struggling companies)

Key Differences Between Private Equity and Venture Capital

Although they’re sometimes confused, they’re not the same. Let’s break it down.

Company Stage and Risk Level

Venture capital enters at very early stages, often in startups that aren’t yet profitable. Super high risk but potentially massive returns.

Private equity prefers more mature companies with stable cash flow, even if they need a strategic overhaul. Lower risk (theoretically), but bigger investment required.

Type of Stake and Involvement in Management

Venture capital investors tend to take minority stakes and play a support role. In private equity, involvement is full-on. The fund takes control, swaps out executives if needed, and reshapes the business strategy.

Time Horizon and Expected Return

Both types of investment are mid- to long-term (between 4 and 10 years), but venture capital aims for 10x returns or more, while private equity targets more moderate but steady and realistic returns.

The Role of Alignment Between Investors and Fund Managers

Now we’re getting into something crucial: making sure everyone’s incentives are aligned.

Common Mechanisms: Incentives, Fees, and Co-Investment

To ensure fund managers have skin in the game, several mechanisms are used:

• Co-investment: Fund managers invest their own money in the fund.

• Success-based incentives (carry interest): If the fund performs well, managers earn more.

• Clearly defined management fees, to avoid conflicts of interest.

Importance of Transparency and Governance in a Fund’s Success

A solid governance structure, external audits, and clear information policies make everything more transparent and fair. And for you as an investor, that’s pure gold.

Advantages and Risks of Private Equity for Investors

Here’s a fair and honest summary:

Advantages:

• Potentially high returns

• Diversification beyond listed markets

• Access to unique opportunities

Risks:

• Low liquidity: your money is tied up for years

• Heavy reliance on the management team

• High operational and market risk

That’s why it’s not for everyone. If you’re tight on cash or prefer safer bets, look elsewhere.

Real Examples of Notable Private Equity Deals

Some of these may ring a bell:

• Cinven and Amadeus: one of Europe’s most profitable exits

• CVC and Deoleo: financial restructuring and growth

• KKR and Telepizza: deep restructuring to relaunch the brand

These cases show the transformational potential (and also the risk) of private equity.

Conclusion: Is Private Equity Right for Your Investor Profile?

If you have substantial capital, a long-term vision, risk tolerance, and the desire to be part of something bigger than yourself, this might be one of the most exciting and profitable investments available. But if not being able to access your money or market swings keeps you up at night, better look elsewhere.

We believe that understanding how private equity works is key to making smart investment decisions, even if you don’t invest in it directly. And if you're looking to explore investment opportunities or are thinking about getting involved in high-potential businesses in Spain, we invite you to visit Business in Spain, where you’ll find plenty of ideas, insights, and real opportunities.

Because investing isn’t just about multiplying money. It’s also about making purposeful choices.