Private Equity (PE) is a dynamic investment strategy that involves directly investing capital into private companies or, less frequently, acquiring public companies for subsequent privatisation.
At North Capital, we are strong proponents of investing in private markets for suitable clients. PE can be a valuable component of a diversified investment strategy due to its potential to deliver outsized returns. Despite this, it requires an understanding of its complexities, including higher risks and longer investment horizons, which may make it less suitable for some investors.
For those new to this asset class, the specialised terminology and structures can appear intimidating, but grasping the fundamentals is crucial for anyone considering an investment. This guide aims to demystify PE by exploring its historical evolution, explaining how it operates today, and highlighting its significance within the broader financial landscape. We will also detail how North Capital can allow clients efficient access to the best opportunities available in the asset class.
The Origins of Private Equity:
From Post-War Beginnings to Modern Finance
The origins of PE are debated, but many agree its roots can be traced back to the aftermath of World War II. In 1946, the American Research and Development Corporation (ARDC) was founded with a bold vision: to finance companies capable of transforming wartime technologies into commercial successes. One of ARDC’s notable investments was in Digital Equipment Corporation (DEC), which became a landmark success. A $70,000 investment in DEC grew to $355 million, yielding an extraordinary return of over 5,000 times the original amount. This success demonstrated the immense potential of PE, laying the foundation for its future growth.
The 1980s marked a pivotal era for the industry, driven by the rise of leveraged buyouts (LBOs). Firms like Kohlberg Kravis Roberts (KKR) spearheaded this movement, acquiring companies at a discount using borrowed funds, restructuring them, and later selling them for substantial profits. This period cemented PE as a transformative force in the financial world, capable of reshaping entire industries.
Today, PE has grown into a global industry managing trillions in assets. PE firms drive transformation across industries like technology, healthcare, and consumer goods. While the U.S. remains the largest PE market, investors are increasingly drawn to Europe and Asia, attracted by lower valuations and strong growth potential. Private markets also attract investors seeking to align their capital with thematic goals, such as impact investing, which provides opportunities for direct and targeted involvement in driving change. It is important to note that approximately 83% of U.S. companies with over $100 million in revenue remain private, underscoring the significant role these markets play in the broader economy.
Key Strategies in Private Equity:
How Private Markets Operate
Private market investing, often grouped together under the broad label of PE, encompasses a wide range of investment strategies that share common principles yet differ in execution. These strategies include, but are not limited to, Venture Capital (VC), Growth Equity, Buyout, and Private Credit, each of which targets specific types of companies at different stages of development.
VC strategies focus on funding early-stage businesses with high growth potential, while growth equity strategies invest in more established companies looking to scale. Buyout strategies target mature companies, acquiring control to restructure or optimise operations to increase the value of the company. In addition, private credit strategies provide financing to companies that may be underserved by traditional credit markets, thus filling a critical gap in the financial ecosystem.
At its core, PE investing focuses on identifying companies—often underperforming or undervalued—and transforming them into more competitive, profitable entities. To achieve this, PE firms raise capital from investors such as pension funds, insurance companies, and high-net-worth individuals, who are collectively known as Limited Partners (LPs). These LPs commit capital to a fund overseen by a PE investment manager, or General Partner (GP). The fund’s lifespan typically lasts around 10 years, over which the GP selects companies to invest in, manages these investments, and eventually exits them, ideally at a profit.
During the fund’s life, GPs work closely with portfolio companies to make operational improvements, streamline processes, and inject new leadership or strategic direction. Once the companies have achieved their growth targets, they are sold, or exited, returning the committed capital plus any profits to the LPs. The GP retains a share of these profits – commonly 20% – in return for the intense work involved in sourcing, growing, and eventually selling the businesses.
Exit strategies vary but typically include trade sales, secondary share sales, or Initial Public Offerings (IPOs). In a trade sale, for example, the portfolio company is sold to another company, often within the same industry, enabling the buyer to expand its operations or market share. In 2023, more than half of PE exits occurred through trade sales (S&P Global, 2024), highlighting their importance as a mechanism for realising gains.
Private Equity Risks and Rewards:
The High Stakes of Illiquidity
PE is known for its potential to deliver high returns through the illiquidity premium—investors are rewarded for committing capital to long-term investments. However, the inherent risks in private markets investing are notable. Once invested, capital is locked up for the duration of the investment, meaning investors cannot access or withdraw funds until the investment reaches maturity, often years later. Additionally, portfolios in PE are often highly concentrated, increasing exposure to single investments or sectors. PE firms also commonly use leverage to boost returns, which can amplify losses if the investment underperforms. Limited transparency and oversight further contribute to the risk profile, as investors have less visibility into asset performance and management decisions. Lastly, returns in private equity are unevenly distributed: top-tier managers can deliver strong results, while underperforming managers may lead to disappointing outcomes.
A notable example of the risks involved can be seen in Toys “R” Us. In 2005, the beloved toy retailer was acquired by a consortium of PE firms, including well-known names like Bain Capital and KKR. The goal was to revitalise the brand, but the outcome was far from what was anticipated. The heavy debt incurred from the buyout (coupled with changing consumer preferences) reduced performance and ultimately contributed to the company’s bankruptcy in 2017, a stark reminder of the risks associated with private equity investments.
Nevertheless, research by the British Private Equity and Venture Capital Association (2024) shows that the UK private equity industry has demonstrated a strong track record of outperforming public markets over time. Since 1980, UK-managed private equity and venture capital funds have achieved an internal rate of return (IRR) of 14.5% per annum. More recently, funds starting from 2014 have generated an even higher IRR of 17.8% annually. Over the past decade, private equity funds delivered a 15.0% annual return, significantly surpassing the 5.3% UK public equity market return.
UK Private Equity Performance Comparison (IRR %)
1IRR refers to the annualised return metric that accounts for the irregular cash flow timing over the life of a private equity investment.
Overcoming Investment Barriers: North Capital’s Partnership with Titanbay
For any clients considering private equity, several key challenges need to be addressed:
Cost
High fees and operational expenses are often associated with manager selection and fund execution.
Access
Securing allocations in top- tier, often oversubscribed funds is challenging, with restrictive high minimum investment thresholds further limiting participation.
Diversification
Building a well-rounded portfolio across strategies, sectors, and geographies typically demands significant capital commitments.
Titanbay:
Enhancing Access to Private Markets
Titanbay, a leading private markets investment platform and new strategic partner of North Capital, allows us to assist our clients in overcoming these challenges. By democratising access to high-quality investments, Titanbay enables investors to participate in top-tier funds with lower minimum commitments, competitive fees, and streamlined administration. Leveraging close relationships with leading fund managers and a rigorous due diligence process, Titanbay makes traditionally exclusive investments more accessible to our clients.
A key offering is the Titanbay Vintage program, developed with Mercer, which diversifies investments across geographies, sectors, and strategies. By balancing investments in VC, growth, buyout, credit, alongside more thematic funds, this program targets strong returns while providing the benefit of diversification to reduce portfolio volatility – all with a reduced investment minimum, as clients gain exposure without needing to invest in the individual funds.
For clients seeking a more tailored approach and capable of meeting higher investment minimums, allocations to individual funds can be made either on an ad hoc basis or as part of a broader portfolio strategy. The funds supporting the Titanbay Vintage program will also be available on a stand-alone basis, offering clients an ever-evolving, curated selection of top-tier funds, each of which is subject to rigorous due diligence by the investment teams at Titanbay and Mercer.
A typical portfolio structure might involve committing to multiple funds each year, which over time leads to the construction of a well-diversified private markets portfolio. By consistently allocating to various strategies and vintages, clients can build a robust investment base that not only reflects their specific strategy preferences but also complements existing private market exposures. This approach ensures flexibility, allowing clients to seize opportunistic investments as they emerge, while gradually creating a balanced and diverse portfolio that spans geographies, sectors, and fund types. Illustratively, an investor may target the following diversified allocation shown below.
North Capital is excited to strengthen our investment capabilities by bringing these exclusive opportunities to our clients through our strategic partnership with Titanbay.
