Table of Contents

What are the different types of private equity investments?

What are special situation investments?

How do companies benefit from private equity investment?  

What are common exit strategies from private equity investments?

The bottom line 

LearnPrivate EquityTypes of Private Equity Investments

Types of Private Equity Investments

Jun 21, 2022


7 min read

Learn about the types of private equity firms and their goals to invest in companies for a certain period, exit the investment, and distribute profits to their investors.

In the Hollywood version of private equity deals, a firm swoops in, seizes a financially troubled business, sells off its assets, wrests control from its owners, and lays off its employees. Then, the firm uses revenue from the company to reward shareholders and push up the share price—selling it off before lining its own pockets with millions of dollars in profit.

There are real-life examples of this kind of deal. For instance, in 2017 the New York Timesdetailed the merger of Sears with Kmart, engineered by hedge fund manager Edward S. Lampert. Using a private equity-style investment strategy, Lampert’s fund had bought Kmart’s debt when it declared bankruptcy in 2002; then, two years later they announced the purchase of Sears. Over the course of a decade, the fund became Sears’ largest shareholder and lender, as well as supplier and landlord, taking steps to merge company sold assets, spin off departments, lay off thousands of employees, and take on huge amounts of debt. Shareholders, including Lampert, were rewarded to the tune of billions of dollars in stock buybacks. Then, the company filed for Chapter 11 bankruptcy the next year.

But this dramatic type of so-called “vulture capitalism” doesn’t define private equity as an industry. In fact, private equity is a broad industry that includes several types of strategies.

What are the different types of private equity investments?

Private equity is an alternative investment, in that it takes place outside the realm of public financial markets. The basic idea behind private equity: A group of partners starts a fund capitalized by high-net-worth individuals or institutional investors (or a combination of both). The fund invests in or buys a company outright, aiming to grow the portfolio company and increase its profitability in a set period. Its investors, who are often seasoned former executives, may also lend mentorship, management experience, and industry expertise to that company. Ultimately, they plan to sell it outright or take it public on an exchange via an IPO, then divest and distribute the profits to the investors.

There are different types of private equity investment strategies used depending on the kinds of companies being acquired, and the ultimate goal of the investment.  

Venture capital (VC). VC firms

are a type of private equity company that typically invest in start-ups and early-stage companies anticipated to grow. Venture capitalists receive equity for their investment, but may only take a minority stake in their portfolio companies, so the company’s management retains control. VC is considered a somewhat risky proposition for investors since these companies are young and likely do not have a proven track record. However, that risk can yield big rewards if a company becomes wildly successful.


PE firms often structure their deals as buyouts, buying an established—even publicly-traded—company and taking it private. When this happens, the company’s prior investors cash in their shares and the PE firm becomes the only investor, with a controlling share. There are two kinds of buyouts.

  • Management buyouts.

    In this type of buyout, a company’s management buys the company’s assets, often raising funds through a private equity firm. All the company’s stakeholders cash in their shares before management takes control. The PE firm in this scenario may take a minority share in the company in exchange for its funding.  

  • Leveraged buyouts

    . In this case, a PE fund finances company’s using a significant amount of debt, sometimes up to 80 or 90%, which allows it to buy a company that’s typically larger than the fund would buy solely with PE fund capital. It typically takes a majority stake, even though it has only put its own funds toward a small part of the purchase, which gives it control over the company’s management and strategy. 

Growth Equity.

PE firms will sometimes choose mature companies that are growing and invest their capital to fund the company’s expansion or acquisition. The firm aims to profit from the growth, and since it typically buys a minority share, mitigating risk. The companies in which they invest often hold low or no debt, and the firm typically receives preferred shares for its investment. Although the PE firm may not insert itself into operations or management, it typically requires the company to furnish a growth strategy to help estimate return on investment.

Real estate.

PE firms that specialize in real estate investments are structured in a similar way to other PE firms, in that their partners comprise limited partners (such as accredited individual investors, pension funds, and insurance companies) and general partners, who manage the fund. They raise capital to develop, buy, operate, and finally, exit a building or development project.

Fund of funds.

A fund of funds is a portfolio that contains other funds. For instance, the portfolio may contain mutual funds, hedge funds, ETFs, other private equity funds, or investment trusts. This private equity fund of funds acts as a limited partner in a PE firm, typically allowing the PE firm access to more diversified offerings. PE investors may not have the capital to achieve the diversification they seek, and a fund of funds can give instant access to multiple strategies and sectors with a single commitment. 

What are special situation investments?

In special situations investing, a PE firm invests because of a special situation rather than the company’s fundamentals. A special situation is often event-driven; for instance, a world event affects a company’s international business, or a rumor is spread about a company’s CEO that damages the perception of the business. If government regulations change, affecting the international arm of a company, that can be considered a special situation. Even the rise in defaults among companies hit hard in the Covid pandemic created opportunities for special situations investors. The event can even be a positive one, which bumps up the stock price in the short term. 

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Firms who specialize in this arena use multiple investment strategies to profit from a company’s recovery from a one-time event or anticipate the end of an artificially inflated stock price.

  • Distressed or turnaround financing.

    A PE firm may take a controlling interest in a distressed company with the intention of selling its assets. Or It might invest with the aim of turning the business around.

  • Mezzanine financing.

    Mezzanine financing is sometimes offered to companies looking for an option that’s not one or the other, but a combination of secured debt and equity.

How do companies benefit from private equity investment?  

As private equity has evolved and the number of PE firms has risen, the strategies they use to invest in companies, and to exit their investments, have also evolved. There are certain advantages for companies that avail themselves of private equity investment.

  • Infusion of cash.

    From start-up capital to funding for buying new equipment or even establishing a completely new business arm, PE firms can be a company’s best bet when they need a large amount of capital.

  • Management and operations expertise.

    The partners in PE firms typically have deep experience in running large companies themselves and tapping into their expertise can be a nearly instant boon to a company in need of expertise, or even business connections.

  • Returns.

    PE firms have a vested interest in creating value, and their returns have been higher historically than public equity. According to private market specialistHamilton Lane, private markets generated a return of 2.45%, versus 1.5% from stocks between 2017 and 2022.

  • Private, creative growth strategies.

    For some private companies, turning to private equity to work out growth strategies without having to bare their balance sheets to the public through SEC filings can be particularly attractive.

What are common exit strategies from private equity investments?

Private equity firms usually intend to hold an asset for a certain period and then exit and distribute the profits. They typically intend to exit before five or six years, although firms’ holding periods vary. The goal of an exit is to sell a company or take it public through an initial public offering (IPO).

Common exit strategies among funds and company management include:

  • Taking a company public via an IPO.

    When PE firms take a company public, they agree to hold on to its shares for a certain period to avoid driving down the price. After that, some shareholders may keep shares, but investors typically sell them.

  • Selling the company outright.

    The company may choose a total or partial exit. In a private placement, another investor might purchase a piece of the business while original PE investors retain a portion. Or the PE fund may simply sell the business to a third party.

  • Selling individual shares.

    Some company executives, or even individual investors, may negotiate to sell all their shares to an existing partner so they can leave the deal before the PE fund exits.

The bottom line 

Companies and private equity funds enter into private equity deals for many different reasons. These investments are structured in multiple ways, for various points in a company’s life cycle, and can profit both companies and the PE firm. There are advantages to accepting private equity funding, such as an immediate influx of cash and expert management advice, that companies may not be able to get in another way. People may have preconceived ideas about the nature of PE investments, but the bottom line is that private equity firms’ goals are to invest in companies for a certain period, exit the investment, and distribute profits to its investors.


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