A private equity firm raises money from large investors, buys companies with it, works to make those companies more valuable, and sells them a few years later. The profit is split between the investors and the firm.
The scale is large. Buyout firms struck deals worth $904 billion worldwide in 2025, according to Bain & Company’s Global Private Equity Report 2026.
What does a private equity firm do? The four core jobs
The work follows a cycle that repeats with each new fund. A firm raises capital, invests it, manages the companies it buys, and then sells them.
Raising capital from limited partners
Pension funds, university endowments, insurers, sovereign wealth funds and wealthy families commit money to a fund. These investors are called limited partners, or LPs.
The private equity firm acts as the general partner, or GP. It picks the investments and runs the fund.
LPs do not send all their money on day one. The firm “calls” capital when it finds a deal.
Finding and buying companies
Deal teams screen hundreds of businesses to find a handful worth buying. They study the numbers, the market and the managers before making an offer.
Many deals are leveraged buyouts. The firm pays part of the price with borrowed money, and the debt sits on the bought company’s books.
Debt can raise returns on the firm’s equity. It also raises the risk if the business struggles.
Improving the companies it owns
After a deal closes, the firm takes board seats and sets targets with management. Common moves include cutting costs, replacing executives, raising prices, entering new markets and buying smaller rivals.
Large firms often employ operating partners. These are former executives who work directly with portfolio companies on areas such as purchasing, pricing or software.
Selling and returning money to investors
A firm exits by selling to a corporate buyer, selling to another private equity firm, or listing the company through an IPO. Cash goes back to LPs, minus fees and the firm’s share of the profit.
Exits picked up in 2025. Global buyout-backed exit value rose 47% to $717 billion, Bain reported.
How a private equity firm is structured
Most funds are set up as limited partnerships with a fixed life of about 10 years. One or two optional one-year extensions are common.
The firm invests during the first few years. It spends the rest of the fund’s life running the companies and selling them. A large firm usually manages several funds at once, each with its own investors and terms.
| Party | Role | Typical examples |
|---|---|---|
| General partner (GP) | Picks deals, runs the fund, earns fees and carried interest | KKR, EQT, Blackstone, TPG |
| Limited partners (LPs) | Supply most of the capital, have no say in daily decisions | Pension funds, endowments, insurers, sovereign wealth funds |
| Portfolio companies | Businesses the fund owns or holds stakes in | Retailers, software firms, healthcare groups |
The rules between GP and LPs sit in a limited partnership agreement. It sets the fees, the profit split, the fund’s life and what the GP may invest in.
How private equity firms make money: the 2 and 20 model
A private equity firm earns money in two ways. The first is a management fee, traditionally 2% of committed capital each year. It pays salaries and office costs.
The second is carried interest, usually 20% of the fund’s profits. Carry has a condition.
LPs must first get their money back plus a preferred return, often called the hurdle rate. That hurdle is commonly 8% a year.
Here is a simple example. A $1 billion fund charging 2% collects $20 million a year in fees.
If the fund returns $2 billion in total, the profit is $1 billion. The GP’s 20% share of that could reach $200 million, depending on the fund’s payout terms.
The 2 and 20 split is a reference point, not a fixed rule. Fee rates have fallen at many funds, and large LPs often negotiate lower terms.
Types of private equity firm strategies
Not every firm buys whole companies. Strategies differ by company stage, stake size and use of debt.
| Strategy | What the firm buys | Typical stake |
|---|---|---|
| Leveraged buyout | Mature companies with steady cash flow, funded partly with debt | Majority or full control |
| Growth equity | Fast-growing companies that need money to expand | Usually minority |
| Take-private | Listed companies removed from the stock market | Full control |
| Buy-and-build | Smaller rivals merged into a company the fund already owns | Full control |
| Secondaries | Existing fund stakes or companies bought from other investors | Varies |
| Distressed investing | Companies in financial trouble, often through their debt | Varies |
Take-privates drove much of the 2025 rebound. The $56.6 billion deal for Electronic Arts set an all-time buyout record, according to Bain.
Private equity firm activity in 2025: key statistics
Bain’s 2026 report shows a strong year for deals and exits but a weaker year for raising new money. Buyout deal value rose 44% to $904 billion. Buyout fundraising fell 16% to $395 billion.
Bain described the recovery as narrow. Seven exits worth more than $10 billion each made up $155 billion, or 22%, of 2025 exit value. The number of exits fell 2% to 1,570.
Unspent capital, known as dry powder, stayed near $1.3 trillion. Bain said sovereign wealth funds and corporate buyers supplied much of the equity in the biggest deals, so buyout funds used less of their own cash.
The largest private equity firms in 2026
Private Equity International’s PEI 300 ranks firms by money raised for private equity over the past five years. KKR leads the 2026 list with $140.4 billion raised. EQT and Blackstone follow.
The PEI 300 counts only private equity fundraising. A firm with large credit or real estate arms can rank lower here than its total size suggests.
Private equity firm vs venture capital firm
Both use the same GP and LP fund model, with fees and carried interest. The difference is the type of company they back.
Venture capital firms buy minority stakes in young startups, many of them unprofitable. They expect most bets to fail and a few to return the fund. Benchmark’s early-stage portfolio is a typical example of this approach.
Private equity firms usually buy control of established companies and often use debt. Growth equity sits between the two.
Founders who take either kind of money give up part of their company. This guide to founder equity and cap tables shows how that dilution adds up across rounds.
The lines also blur at the late stage. Bain Capital joined the $1.7 billion round for industrial automation company Atoms in July 2026. The size of these late-stage rounds shows up in 2026 generative AI funding data.
FAQ
What does a private equity firm do in simple terms?
It raises money from large investors, buys companies, works to make them more valuable, then sells them, usually within several years. Profits are split between the investors and the firm.
How do private equity firms make money?
Through a yearly management fee, traditionally 2% of committed capital, and carried interest, usually 20% of profits. Carry is paid only after investors get their money back plus a hurdle return, often 8%.
Who invests in private equity funds?
Mostly institutions: pension funds, university endowments, insurers, sovereign wealth funds and family offices. They are limited partners and commit capital to funds that typically last about 10 years.
What is the largest private equity firm in 2026?
KKR tops the 2026 PEI 300 ranking with $140.4 billion raised for private equity over five years. EQT ranks second with $134.4 billion, and Blackstone ranks third with $111.8 billion.
How much did private equity firms invest in 2025?
Global buyout deal value reached $904 billion in 2025, up 44% from 2024, according to Bain & Company. Buyout-backed exits rose 47% to $717 billion.
