What is Private Equity?

In our previous posts, we covered tokenisation and private credit. Now let's talk about the other major branch of private markets: private equity.

If private credit is about lending money to businesses, private equity is about owning them.

It's a distinction that matters. The risks are different. The returns work differently. The timeframes are different. And understanding both helps you make sense of what "investing in private markets" actually means.

What is private equity?

Private equity is buying ownership stakes in companies that aren't listed on a stock exchange.

When you buy shares in a company like Naspers on the JSE, that's public equity. Anyone can buy it. The price changes every second. You can sell whenever you want.

Private equity is different. The companies aren't listed. You can't just log into your trading app and buy shares. The investments are negotiated directly, usually by specialised funds that pool money from investors.

The basic idea is straightforward: buy a stake in a company, help it grow or improve, then sell that stake later at a profit.

Here's a simple comparison:

How does private equity actually work?

Most private equity happens through funds. Here's the typical lifecycle:

1. Fundraising. A private equity firm raises money from investors. Historically these were pension funds, endowments, and wealthy individuals. The firm commits to investing that money according to a specific strategy.

2. Investing. The firm identifies companies to buy. They might acquire entire businesses or buy significant stakes. The focus is usually on companies they believe are undervalued or have potential for improvement.

3. Value creation. This is where private equity differs from just buying shares. The firm actively works to improve the business. New management. Operational changes. Strategic pivots. Cost cutting. Expansion. The goal is to make the company worth more than what they paid.

4. Exit. After several years, the firm sells its stake. This might be through a sale to another company, a sale to another private equity firm, or taking the company public through an IPO. The profits are distributed to investors.

The whole process typically takes 7-10 years from when you commit your money to when you get it back.

How is private equity different from private credit?

This is where people often get confused, so let me be direct about it.

Private credit = lending. You provide a loan. You earn interest. You get paid back before owners if things go wrong. Lower risk, more predictable returns.

Private equity = owning. You buy a stake. You share in profits and losses. If things go wrong, you're last in line to get paid. Higher risk, potentially higher returns.

Here's another way to think about it:

Neither is "better" than the other. They serve different purposes and suit different risk appetites.

If you want predictable income and can't afford to lose your capital, private credit makes more sense. If you can lock up money for years and want a shot at higher returns, private equity might be appropriate.

What kinds of private equity exist?

Private equity isn't one thing. It's a category that includes several strategies:

Buyouts. The fund buys a controlling stake in an established company, often using borrowed money (leverage) to amplify returns. This is what most people mean when they say "private equity."

Growth equity. Investing in companies that are already profitable but need capital to expand. Less risky than buyouts because the company is already working.

Venture capital. Investing in early-stage startups. High risk because most startups fail, but potentially huge returns if one succeeds. Technically a subset of private equity, though often discussed separately.

Distressed investing. Buying companies or assets that are in trouble, often at steep discounts. The bet is that the situation can be turned around.

Each strategy has different risk and return characteristics. Venture capital is the most volatile. Buyouts and growth equity sit in the middle. Distressed investing depends heavily on the specific situation.

How big is the private equity market?

Globally, private equity manages trillions of dollars. The exact figures depend on how you count, but it's one of the largest pools of investment capital in the world.

In South Africa, SAVCA's 2024 survey reported total funds under management of R237 billion at the end of 2023. That's a significant market, and one of the most developed in Africa.

Fundraising has been strong. The industry raised R28.1 billion in 2024, a 43% increase from the previous year. Interestingly, 59% of that money came from investors outside South Africa, mainly from Europe and the US.

The sector is also evolving. Generalist funds have fallen out of favour, with investors preferring specialist funds focused on specific industries like infrastructure, healthcare, or technology.

What returns can you expect?

This is where private equity gets interesting, and where you need to be careful.

The headline numbers look impressive. According to data from Cambridge Associates, US private equity delivered average annual net returns of 14.6% over a 20-year period. That's better than most public market indices over the same period.

But there are important caveats:

Averages hide huge variation. The difference between top-performing and bottom-performing funds is enormous. Pick a bad fund and you could lose money. Pick a great one and you could double it. Manager selection matters more in private equity than almost any other asset class.

You can't access your money. Those returns assume you stayed invested for the full period. Unlike shares, you can't sell when things look shaky. Your money is locked up, typically for 7-10 years.

Fees are high. Private equity funds typically charge 1.5-2% annual management fees plus 20% of profits above a certain threshold. These fees eat into your returns.

Past performance is genuinely uncertain as a predictor. The market conditions that generated historical returns may not repeat.

I'm not saying private equity is bad. I'm saying you should understand what you're getting into.

What are the risks?

Let me be clear about what can go wrong:

Illiquidity. Your money is locked up for years. If you need it back, you probably can't get it. Some secondary markets exist for selling fund stakes, but you'll likely take a significant discount.

Loss of capital. Unlike private credit where you're first in line if things go wrong, equity investors are last. If a company fails, you can lose everything you invested in it.

Manager dependence. Your returns depend heavily on the fund manager's skill. A bad manager won't just underperform, they can lose your money.

Valuation uncertainty. Private companies aren't priced by a market every day. The values you see in reports are estimates. The true value is only known when the company is actually sold.

Concentration risk. Many funds hold relatively few companies. If one or two investments go badly, it can drag down the whole fund.

Economic sensitivity. Private equity returns depend on economic conditions. In a recession, companies struggle, and exits become harder. The firms that acquire companies also use debt (leverage), which amplifies both gains and losses.

How can ordinary investors access private equity?

Historically, private equity was only available to institutions and the very wealthy. Minimum investments of R1 million or more were standard, and many funds wouldn't accept individual investors at all.

That's changing, though access is still more limited than for public markets.

Listed private equity firms. Some private equity firms are themselves listed on stock exchanges. Buying their shares gives you indirect exposure to their portfolio of investments. In South Africa, examples include Ethos Capital (listed on the JSE).

Funds with lower minimums. Some funds are now structured to accept smaller investments, though "smaller" might still mean R100,000 or more.

Tokenised private equity. This is newer, but platforms are beginning to offer tokenised stakes in private equity investments with lower minimums. 27four on Mesh.trade is one South African example.

Retirement funds. If you're invested in a pension or retirement fund, there's a good chance some of your money is already in private equity. Many institutional investors allocate a portion to the asset class.

The key, as always, is to understand what you're buying. What's the strategy? What companies are in the portfolio? How long will your money be locked up? What are the fees?

Who is private equity right for?

Private equity might make sense for investors who:

• Can genuinely lock up money for 7-10 years

• Don't need liquidity or predictable income

• Can afford to lose the invested capital

• Want exposure to company growth rather than just interest payments

• Understand and accept the risks of equity investing

• Have access to quality funds (this is harder than it sounds)

It's probably not right for:

• Anyone who might need the money within the next decade

• Investors who can't stomach significant volatility

• People looking for regular income

• Those who aren't comfortable with the uncertainty of private market valuations

Private equity is a tool for diversification and potential growth, not a replacement for more liquid investments.

Private credit vs private equity: which is better?

This is the wrong question, but I understand why people ask it.

They're different tools for different purposes:

Choose private credit if:

• You want predictable, regular income

• You're more concerned about protecting capital than maximising growth

• You prefer being first in line if things go wrong

• You want shorter, more flexible time commitments

Choose private equity if:

• You're focused on long-term growth, not income

• You can accept higher risk for potentially higher returns

• You're comfortable being last in line if things go wrong

• You can truly lock up money for a decade

Many sophisticated investors use both. Private credit provides steady income and stability. Private equity provides growth potential. Together they offer a more complete exposure to private markets than either alone.

The bottom line

Private equity is ownership of private companies. You share in their success and their failure. The potential returns are higher than private credit, but so is the risk, and your money is locked up for much longer.

It's been one of the best-performing asset classes over the long term, but that average hides huge variation between funds. Manager selection matters enormously.

For most retail investors, private equity has been out of reach. That's starting to change with lower minimums and tokenised structures, but access is still more limited than for public markets or private credit.

If you're building a portfolio that includes private markets, understanding the difference between lending (private credit) and owning (private equity) is fundamental. They're not interchangeable. They're complementary.