Table of Contents

What is a private equity firm?

What do private equity firms do? 

Difference between active and passive investors

How do private equity firms make a profit?

What are the types of private equity investment?

The bottom line

LearnPrivate EquityWhat Are Private Equity Firms and How Do They Work?

What Are Private Equity Firms and How Do They Work?

Jun 21, 2022


6 min read

Learn all about how private equity continues to have the potential of being a highly profitable investment vehicle for wealthy investors and institutions.

When financier J.P.Morgan used his own money and that of his backers to do a series of mergers in the early 1900s to create U.S. Steel, the country’s first billion-dollar company, he was engaging in an early form of private equity. However, the term “private equity” would emerge after the end of World War II, and later become closely associated with industry giants like KKR (Kohlberg Kravis Roberts & Co.) and Blackstone.

Today, the private equity industry is made up of investment funds that raise billions of dollars every year from institutional investors and wealthy individuals. They use the money for everything from funding startups to buying big, established companies, which they then try to restructure and make more efficient, profiting when they are sold.

What is a private equity firm?

A private equity firm is a type of investment management company that is not listed on a public exchange and offers capital raised from limited partners to private or public companies. PE funds may invest in a startup company or in an established company that’s in need of cash. For instance, a business may be open to this option if under financial strain, seeking growth, or having concerns that a leadership transition (such as founder’s retirement) might impact the company’s value. Companies may turn to private equity as an alternative to high-interest bank loans or listing on stock exchanges.

Private equity investors are a mix of multiple individuals or institutional investors. Specifically, these investors are high-net-worth individuals or institutions that invest individually, in groups, or operate as venture capital companies. In a buyout, for example, a private equity firm adds a company to its portfolio of businesses and aims to increase its worth within a set period. Most of these are long-term investments, with holding periods of three to five years.

During that time, the fund manager increases the value of the portfolio company by improving its operations, deleveraging it (decreasing its debt to equity ratio), or expanding it with the goal of selling it at a profit and distributing the proceeds among investors. The holding period, or time from purchase to sale of the company, may exceed the five years it could take for a PE firm to turn around or ready a distressed company for an initial public offering (IPO), or sale.

What do private equity firms do? 

Private equity firms bring together two groups of partners who work together to create a fund. The fund contains the capital the firm uses to invest in—and buy—companies. These two partner groups are:

  • General partners

    . This is the partner that manages the fund. This partner, or group of partners, owns a minority share and has full liability.

  • Limited partners

    . These investors—often high-net-worth individuals, public or corporate pension funds, endowments, or foundations—own the majority share and have limited liability. 

Once the fund reaches its goal for raising capital, the partners close it and invest the capital into the portfolio companies. Investment structures vary, but they often take the form of leveraged buyouts, in which the private equity firm uses debt to make their equity investment go further.   

To accomplish their investment goals, private equity firms complete five core operations:

  1. Raise capital.

    Private equity firms join with limited partners or outside financial institutions to raise a substantial amount of capital to create the fund.

  2. Sourcing and origination.

    When PE firms are considering companies to add to their portfolio, they vet the company’s management, financial performance, as well as the services they provide. Then, after sourcing a deal, the investment team analyzes the company’s strategy, risk, business model, and management team, among other factors.

  3. Strategy.

    Private equity firms employ three key types of strategies for the companies in their portfolio: venture capital, growth equity, and buyouts. Each requires a different skill set and represents a strategy appropriate for companies at different stages of development. For instance, venture capital typically invests in start-ups while more established companies are candidates for a full buyout.

  4. Improve and/or exit.

    Private equity firms usually hold their assets for a certain period of time, and then exit and distribute profits to investors. An exit normally takes from three to five years, although holding times may vary. In the interim, the PE firm pays down the debt used to finance the company’s purchase, increases the business’s working capital, supports or installs new management and tries to boost profits. The goal of an exit is to sell a company or take it public through an IPO.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get Started

Difference between active and passive investors

Private equity firms may have different levels of engagement with their portfolio companies. Some firms may be passive investors, meaning they are strictly making an investment and relying on the company’s management to generate returns. 

Active private equity firms may be more involved in a portfolio company’s operations or management. For example, they may leverage relationships with industry executives to offer expertise on trimming company inefficiencies, or strategic support to help a company reach its performance goals.

How do private equity firms make a profit?

Equity firms make a profit by collecting both management and performance fees, typically 2% of the assets under management (AUM) and a 20% performance fee charged on profits. This is known as the 2-and-20 rule.

  • Management fees.

    A standard fee for a PE firm to charge to its limited partners— investors who usually own most of the private equity fund—is 2% of committed capital, or what the investor committed to the private fund. This fee is charged regardless of the fund’s performance. For instance, if a fund were valued as $3 billion, a fund charging a 2% fee would earn $60 million in revenue. These management fees are paid annually.

  • Performance fees.

    PE firms often charge a performance fee of up to 20% of an investment’s profits beyond a certain threshold, or hurdle rate. The typical hurdle rate is 8%.

What are the types of private equity investment?

Private equity firms raise money for various types of funding.

  • Angel investment.

    These firms make investments in startups or early stage companies. These businesses can be young, so they may not yet have revenue. Angel investors generally don’t take a controlling stake in the company. In exchange for money, the company may give the investor the right to buy shares in a future equity round—but most deals are simply cash for equity.

  • Venture capital (VC).

    VC firms also invest in startups, but typically look for companies that have revenue but need resources to grow. The company may have a growing customer base and a plan to reach profitability. VC firms can receive equity, preferred shares, and convertible debt securities in companies.

  • Private equity or growth equity.

    These firms often look for companies that are generating profits but need an influx of cash to grow. The company will often have a stable cash flow and profit margins but be unable to draw down debt. Private equity firms often buy a controlling interest in the business but may take a minority position.

  • Distressed funding.

    Firms that engage in distressed funding, sometimes called vulture funding, invest in underperforming businesses with the intention of turning them around or selling their assets for a profit. Companies that have filed for Chapter 11 bankruptcy protection are sometimes candidates for vulture funding.

The bottom line

Private equity is a form of financing that takes place outside public financial markets. Private equity firms and their limited partners invest directly in companies, with the goal of selling it at a profit and distributing the proceeds to investors. Although PE firms employ various strategies to accomplish this, their essential task is to seek out, acquire, and invest in portfolio companies that they can grow and create value in relatively quickly, then divest. Private equity continues to have the potential of being a highly profitable investment vehicle for wealthy investors and institutions, and a major growth engine for the companies in which they invest.


Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

Private Credit vs. Private Equity: What Are The Main Differences?

Private equity is a larger industry than private credit, they grew over the last two decades. They are important to institutional investors as pension funds and endowments.

Read More

Private Credit Investment Strategies & Types

There are many strategies that investors can use when deciding how to approach the private credit market, they range from low-risk to high-risk distressed credit opportunities.

Read More

How To Invest In Private Equity: A Step-by-Step Guide

Private equity is an umbrella term that covers different types of private investments, funds, and firms. Find out how to invest in private equity here.

Read More

What You Need to Know About Investing in Private Credit

Private credit refers to loans made to borrowers who don’t meet the qualification for traditional bank loans. In return, investors expect to receive market-beating returns.

Read More

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash


© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at 508 LaGuardia Place NY, NY 10012.