7.4. Private Equity

Private equity refers to investing that is not traded on an exchange. A typical private equity (PE) path is as follows: a PE firm, often structured as a limited partnership, buys companies or other assets, preferably when they are down, often with lots of debt. After a few years of cutting costs, boosting profitability, and perhaps sucking cash out of the company, when the market is up, the PE firm sells the company or it takes the company public via an IPO. As an asset class, PE investing is less liquid because it is not traded on an exchange, but there is some secondary market for PE investments. Pension funds and universities are big investors in private equity. Hedge funds are close cousins of private equity in that they, too, represent investment from instit