Over the past couple of years, private equity has gained a higher profile again because of the role of managers in corporate activity, whether it is in acquiring businesses or assisting with management buy-outs.

Private equity invests in unquoted companies that are at an early stage of development, are not subject to the same levels of disclosures as quoted companies and have yet to prove they can generate sustainable earnings and profits. Therefore, the risks and rewards of private equity can be characterised as being higher than for equity funds in general. 

There are three ways in which private equity managers invest in companies. They provide capital for early stage businesses, capital for established companies that require money to develop or provide finance for a management buy-out.

This is an illiquid form of investment. It usually takes a number of years for a fund manager to invest his capital and it often takes many years to realise a return. This is primarily achieved through the company being taken over or listing on a stock exchange.

It is difficult to judge the likely returns and correlation of private equity to other asset classes because performance varies significantly from one private equity fund to another. Not only is private equity relatively illiquid, it can also lack transparency, can be risky and difficult to access. Nevertheless, there is the potential for much higher returns than from listed equities. It is advisable to use collective funds to access private equity because of the diversification they provide.