What is private equity? Definition and how it works, explained simply

Updated on June 18, 2026

Private equity is capital invested in companies that are not traded on a stock exchange. You typically invest through funds that acquire stakes in private companies, develop them over several years, and eventually sell their shares.

The term is becoming more relevant for retail investors because private markets are more accessible today than in the past. At the same time, private equity remains a long-term, less liquid investment that carries distinct risks.

What is private equity? The short definition

Private equity refers to private capital invested in companies outside the stock market, usually pooled through a fund.

The definition of private equity is quite straightforward: a fund collects capital from investors and acquires stakes in companies that are not listed on any stock exchange. This capital can be used to finance growth, manage business succession, facilitate acquisitions, or drive operational development.

If you are wondering what private equity means, a simple comparison helps: with a stock, you buy a small share of a publicly traded company. Private equity involves stakes in private companies whose value is not visible every day through a stock market price.

This makes private equity less accessible and less liquid. In return, value is often created where many investors in the public market cannot even look: in companies that are still private or choose to remain private.

How does private equity work?

Private equity usually operates through funds that raise capital, select companies, acquire stakes, and aim for an exit after several years.

In practice, this process can be simplified into four steps:

An asset manager launches a private equity fund and raises capital from investors.

The fund acquires stakes in private companies, either directly or through individual transactions.

The company is developed over several years, for example through growth, improved processes, new markets, or acquisitions.

The process concludes with an exit, such as a sale to another investor or an initial public offering (IPO).

The key players are the asset manager or financial investor, the fund itself, and the investors providing the capital. What’s important for you to know: you generally don’t invest in a single company, but rather in a fund that can bundle multiple holdings.

Value is therefore rarely created through daily price movements. It is created through work on the company itself. This is precisely why private equity requires time.

The three phases: Venture, Growth, and Buyout

Private equity is an umbrella term. It covers various phases of private corporate financing, ranging from very young start-ups to established companies.

Venture Capital: Capital for young, innovative companies and start-ups. The risk here is often particularly high because business models are still in their early stages.

Growth Capital: Capital for companies that are already on the market and want to grow faster, for example internationally or through new products.

Buyout: Investments in more mature companies, often with the goal of further developing their strategy, financing, or operational processes.

Venture capital is therefore the early phase within private equity. If you want to dive deeper, you can find a comparison of private equity vs. venture capital here, and more on venture capital here.

Private equity in concrete examples

Private equity can quickly sound abstract. Concrete names show better what it’s all about: it’s about real companies, real changes in ownership, and real development.

Douglas is a well-known example. The perfume chain was supported by CVC and later taken public again. TK Elevator, the elevator manufacturer from the former Thyssenkrupp group, went to Advent and Cinven. Axel Springer was taken off the stock exchange by KKR and developed further as a private company.

These examples show three typical situations: a consumer company with a strong brand, an industrial company with a global business, and a media house undergoing strategic restructuring. Private equity is therefore often closer to the engine room of the economy than the term might suggest.

What distinguishes private equity from a stock?

The biggest difference lies in access and tradability. You generally buy and sell stocks on any trading day. Private equity investments usually run through funds, are more long-term in nature, and can only be returned or sold to a limited extent.

With a stock, you see the price every trading day. With private equity, valuations are updated at longer intervals because the companies are not traded on the stock exchange. This can visually smooth out short-term fluctuations, but it does not change the economic risk.

A comparison with ETFs also comes up frequently. The details on that belong in a separate article on the private equity ETF, because that is where many misunderstandings arise.

Why was private equity long reserved for institutional investors?

For a long time, private equity was primarily a market for pension funds, insurance companies, foundations, and family offices. The reason was pragmatic: high minimum investments, closed-end funds, long terms, and complex documentation.

Many classic private equity funds run for many years. Capital is committed, called up gradually, and later returned through exits. This structure often suits large institutional investors better because they plan for the long term and can distribute large amounts of capital across many investments.

Today, evergreen structures and ELTIF 2.0 are building a bridge for retail investors. Evergreen funds are fundamentally designed for the long term, but without a fixed end date like many closed-end funds. The ELTIF is a European fund structure that can provide retail investors with access to private markets.

An ELTIF and an ETF function in fundamentally different ways. An ETF is usually tradable on a daily basis, whereas an ELTIF is geared toward the long term; redemptions, depending on the fund, may occur quarterly, for example, and can be limited. Capital is tied up for a longer period, liquidity is restricted, and losses up to a total loss are possible.

How can retail investors get access today?

Retail investors can now access private equity through regulated fund structures and specialized platforms. If you want to deepen your understanding, the Private Equity Guide summarizes the most important components in more detail.

Through NAO, investors gain access to funds from established asset managers such as Partners Group, UBS, and ARK Invest, starting from 1 euro and also via savings plans. Venture capital, as an early phase of private equity, is accessible via the Redstone fund. This is curated access to established private market managers, with a clear classification of the structure, opportunities, and risks. You can find an overview of private equity solutions at Private Equity with UBS and Partners Group.

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Conclusion

Private equity is private investment capital for companies outside the stock market. The core is simple: capital flows into private companies, value is built there over years, and the end goal is ideally an exit.

The most important takeaway for you is this: private equity can open up access to a part of the economy that is not directly visible on the stock market. At the same time, it ties up capital for a longer period, redemptions may be restricted, and losses up to a total loss are possible.

This article does not constitute investment advice or a recommendation, but rather a general overview. The respective fund documents and the KID, which you can find in the NAO app, are always the authoritative sources.

Private equity is not a quick trade on your phone. It is investment capital that requires patience, selection, and risk.

FAQ

What is private equity in simple terms?

Private equity is investment capital for companies that are not listed on the stock exchange.

You typically invest through funds that acquire stakes in private companies, develop them over several years, and eventually sell their interest.

What does private equity mean in German?

In German, private equity is referred to as "privates Beteiligungskapital."

It refers to capital invested in companies outside of the stock market, often through funds with a long-term investment horizon.

How does private equity work?

Private equity works through capital, investment, value creation, and exit.

A fund raises capital, acquires stakes in private companies, works on their development over several years, and later sells the stake, for example to another investor or through an initial public offering (IPO).

What is the difference between private equity and venture capital?

Venture capital is the early-stage phase within private equity.

It focuses on young, innovative companies and start-ups. While the term "private equity" is often used in everyday language to refer to investments in more mature companies, it is an umbrella term that encompasses venture, growth, and buyout strategies.

What is the difference between private equity and stocks?

Stocks are publicly traded, whereas private equity refers to investments in private companies.

You can usually buy and sell stocks on any trading day. Private equity funds are more long-term, less liquid, and redemptions may be restricted.

Can retail investors invest in private equity?

Yes, retail investors can now invest in private equity through specific fund structures.

These include, for example, ELTIFs and evergreen funds. Nevertheless, the investment remains long-term, less liquid, and carries risks, including the potential for a total loss of capital.