Private Equity (PE) is an asset class that invests in the equity of an unlisted company. Depending on the investment type, a PE-corporation becomes either a minority or a majority shareholder. In contrast to debt capital, PE takes full responsibility for profits and losses of the invested company. Thus, there is a higher rate of risk, while there is on the other hand a potential for bigger gains.
Alongside the pure investment activity, a PE-corporation supports the company with its management knowledge to realize potential efficiency gains. Hence, it becomes obvious that PE investments focus on the long-run.
Due to the long-run perspective of the investment one has to be cautious about the j-curve effect. That means that due to fees and capital calls, the investment produces negative cash-flows in the short-run but higher profits in the long-run. Therefore, one can expect the first returns after a couple of years. For investors who need periodic payments, this asset class may cause some problems.
The performance of this asset class is nevertheless remarkable. According to a Preqin report, the median IRR of all closed PE funds of the last 3 years in 2014 was about 16%. The IRRs of course vary between the different strategies and different risks.