Private equity firms control companies you interact with every day — restaurant chains, care homes, supermarkets, software businesses — without being publicly listed. The defining feature is the use of leverage (debt) to amplify returns, alongside intensive operational improvement of the acquired companies.
The leveraged buyout (LBO) structure
Most PE deals are structured as leveraged buyouts. Instead of paying 100% cash for a company, the PE firm pays perhaps 30–40% from its fund and borrows the remaining 60–70% against the company's own assets and future cash flows.
How PE firms generate returns
PE firms have three levers they can pull:
- Multiple expansion: Buy at 7× EBITDA, sell at 10× EBITDA because markets improved or the company grew more attractive. This is the least repeatable lever.
- Earnings growth: Improve the business — cut costs, expand into new markets, make bolt-on acquisitions. This is real value creation.
- Leverage: The debt means the equity portion gets a disproportionate share of value creation. A 20% increase in enterprise value can translate to a 50%+ return on equity invested.
The controversy
Critics of private equity argue that many of the gains come not from genuine value creation but from: financial engineering (loading companies with debt to extract dividends), cutting workforces, and benefiting from lower tax rates on "carried interest" income. The evidence on PE's impact on employment, quality, and long-term business health is mixed — with healthcare and care homes attracting the most criticism.
Supporters argue that PE disciplines management, forces operational focus, and provides capital to companies that public markets wouldn't fund efficiently.
What this means for you
Most retail investors can't access private equity directly — minimum investments are typically £/$ 5–10 million. But PE-backed companies affect you as a consumer (and potentially as an employee). As an investor, some listed PE firms (3i, KKR, Blackstone, Apollo) offer indirect exposure through the stock market, though you're mainly buying the management company rather than the underlying portfolio.