Financial services (5 of 5)

Private equity and venture capital

About 9 minutes to read in full, or 1 minute for the short version belowFacts checked 30 September 2026

In one minute

Private equity and venture capital firms raise money from big investors, buy stakes in companies, try to make them worth more over a few years, and then sell them.

The big idea: A fund earns its return when a company is sold for more than was paid. In a buyout that gain comes from three sources: higher earnings (EBITDA), a higher sale multiple, and debt repaid from the company's cash, and debt makes the owners' gain grow faster than the company's value. The firm running the fund is paid a yearly management fee plus a share of the profit (carried interest), so the price paid at entry decides almost everything.

One unit, in numbers: One buyout deal held for five years: EUR 1 billion comes in, and EUR 360 million (36%) is left after its own costs.What is left is the unit's contribution, before the costs of the whole company. See the worked example
Typical margin: Measured as deal returns, not margins: buyouts aim for about 2 to 2.5 times the money over five years, roughly 15 to 20 percent a yearRoughly how much of every 100 of sales (or income) is left as profit after the running costs. More on margin
Capital intensity: LowLittle money is tied up in buildings, machines or stock, so growing is cheap. More on capital intensity
The number to watch: IRR (internal rate of return)The yearly return that turns the money invested into the money received; it rewards speed.

Ask this first in a case

What kind of fund is the client: buyout, growth, venture or private credit, and what return does it need?

Words used above (3)

EBITDA:: Earnings before interest, tax, depreciation and amortisation: a rough measure of cash profit from operations.
IRR:: Internal rate of return: the yearly return rate, which rewards getting money back sooner.
Carried interest:: The share of a fund's profit, commonly 20 percent, paid to the firm that runs it.

The industry's other words are explained in Words to know (12).

On this page (17 sections)

How money is made

Management fees: about 1.5 to 2 percent a year, usually on committed capital while the fund invests and on invested capital after that; they pay the team and offices.
Carried interest (carry): commonly 20 percent of the fund's profit, usually paid only after investors get their money back plus a minimum return (the hurdle), which is by common convention about 8 percent a year. These are market habits, not rules, and each fund negotiates its own terms.
The investors (limited partners) earn the rest of the gain, which comes from earnings growth, a higher sale multiple and debt repaid in buyouts.
Venture capital funds earn nearly all their return from a few very large winners that pay for many failures (the power law).
Some firms also charge deal and monitoring fees to the companies they own, often shared with investors.

Worked example: one unit

Unit economics means the money in and out for one unit of the business. Start from the revenue, take away the unit's own costs, and what is left is its contribution. More on unit economics

The unit: One buyout deal held for five years: a European business services company bought for EUR 1,000 million (10 times EBITDA of EUR 100 million) with EUR 500 million of equity and EUR 500 million of debt, in EUR millions. Illustrative, rounded figures.
Line	Amountin EUR millions	ShareShare of revenue
Equity value at exit (EBITDA grown to EUR 130 million, sold at 10 times, minus EUR 300 million of debt left)	EUR 1,000	100%
Minus Equity the fund invested at entry	EUR 500	50%
Minus Management fees over five years (about 2 percent a year on EUR 500 million)	EUR 50	5%
Minus Carried interest: 20 percent of the EUR 450 million profit after fees	EUR 90	9%
What is left (contribution)	EUR 360	36%

Check: EUR 1,000 minus EUR 640 of costs leaves EUR 360 (in EUR millions).

So what: The deal doubles the equity before fees, a 2.0 times multiple and about a 15 percent yearly return; after fees and carry, investors get EUR 910 million back on EUR 550 million, about 1.65 times. Three fifths of the gain came from growing EBITDA and two fifths from repaying debt; with debt now costing more, many deals use less of it than this example, which puts even more weight on EBITDA growth. The exit multiple is the risk that moves it most: selling at 8 times instead of 10 would cut the equity at exit from EUR 1,000 million to EUR 740 million.

Key measures(8)

Key measures (also called KPIs, key performance indicators) are the numbers people in this industry track. Ask for the first one or two early in a case.

IRR (internal rate of return)
The yearly return that turns the money invested into the money received; it rewards speed. Glossary: IRR (internal rate of return)
Typical: Turning money into 2.5 times over five years is about a 20 percent IRR, the benchmark Bain uses; doubling in five years is about 15 percent[1]
MOIC (multiple on invested capital)
Money received divided by money invested; it ignores time. Glossary: MOIC (multiple on invested capital)
Typical: Bain's benchmark is 2.5 times over five years; the worked deal here doubles the money[1]
Management fee and carried interest
The yearly fee and the share of profit the firm earns, often called "2 and 20".
Typical: About 1.5 to 2 percent a year and 20 percent of profit, usually after a hurdle that is by convention often about 8 percent a year; terms vary by fund, and Bain notes management fees are falling[3]
Distributions to investors
Cash paid back to investors in the year as a share of the value of their unsold holdings: the measure investors watch most now.
Typical: About 14 percent in 2025, below 15 percent for four years in a row[1]
Holding period
How long a fund owns a company before selling it; longer holds lower the IRR.
Typical: About seven years at exit in 2025, up from five to six years in 2010 to 2021[1]
Dry powder
Money investors have promised to funds that has not been invested yet. Glossary: Dry powder
Typical: About USD 1.3 trillion for buyout funds worldwide[1]
Entry and exit multiple (EV/EBITDA)
The price paid or received for the whole company (enterprise value) divided by its yearly earnings before interest, tax, depreciation and amortisation.
Net debt to EBITDA (leverage ratio)
How many years of earnings the company's debt equals; higher means more risk and a higher possible return.

First questions to ask

When a case lands in this industry, these questions get you to the numbers that matter.

What kind of fund is the client: buyout, growth, venture or private credit, and what return does it need?
Is the market attractive: size, growth and profitability?
Is this company winning in it, and is the management plan realistic?
What price, how much debt, and what exit multiple is realistic, not just hoped for?
Where will the EBITDA growth come from: price, volume, costs or add-on acquisitions?

Value chain: where the margin sits

The value chain is the steps a product or service passes through, from the first supplier to the customer. Each step below shows how much of the value it keeps. More on value chains

Step 1: Raise a fund from investors (limited partners)
Margin varies
Pension funds, insurers, sovereign wealth funds (ADIA, GIC, PIF), endowments and family offices commit money; placement agents help
Investors promise money up front and the firm calls it when it finds deals. Fundraising is harder when past funds have not paid cash back.
Step 2: Find deals (sourcing)
Thin margin
Deal teams at the private equity or venture firm, investment banks, founders and company owners
Lots of work for few deals: most companies looked at are never bought.
Step 3: Check the business before buying (due diligence)
Fat margin
Consultants for the market and competition (commercial due diligence), accountants, lawyers, tax and IT advisers
A large and steady source of consulting work, done in two to six weeks.
Step 4: Pay for the company: equity plus debt
Medium margin
The fund puts in equity; banks and private credit funds lend the rest in a leveraged buyout
Lenders earn interest and fees; more debt raises the owners' return and the risk.
Step 5: Own and improve the company (value creation)
Margin varies
The firm's operating partners, company management, and consultants on pricing, costs and add-on acquisitions
Bain says funds now need 10 to 12 percent EBITDA growth a year to earn what 5 percent used to deliver, so this step decides returns.
Step 6: Sell the company (exit) and pay investors back
Fat margin
Buyers from industry (trade sale), other funds (secondary buyout), the stock market (IPO), or a continuation fund run by the same firm
Carried interest is earned here, once investors have their money back plus the hurdle return.

Profit pool: who keeps the money

Where in the value chain the profit ends up, which is often not where most of the sales are. More on profit pools

For the firms, the profit is in carried interest and in fees on very large funds, so the biggest firms that raise money easily earn the most. For investors, most of the gain comes from buying at the right price and growing earnings; with prices high and interest costs up, cheap debt and a rising sale multiple no longer carry returns. Advisers earn steadily either way: consultants, lawyers, bankers and lenders are paid on every deal.

Cost structure(4)

The main costs, each as a share of revenue (the money from sales).

How a fund's money is shared (common terms, which vary by fund). Management fees paid by investors: About 1.5 to 2 percent of committed capital a year while investing, often lower later[2]
Carried interest paid to the firm: Commonly 20 percent of the profit, after investors get a hurdle return that is by convention often about 8 percent a year[3]
Investors' (limited partners') share of the profit: The rest: about 80 percent of profit after fees once the hurdle is met[2]
Interest on the buyout debt, paid by the company the fund owns: Varies with rates and debt levels; it reduces the cash left to repay debt

Benchmarks(7)

Typical figures for the industry, to check a client's numbers against.

Global buyout deal value, 2025: About USD 904 billion, up 44 percent, from about 3,000 deals[1]
Buyout-backed exit value, 2025: About USD 717 billion, up 47 percent[1]
Buyout fundraising, 2025: About USD 395 billion, down 16 percent[1]
Unsold companies held by buyout funds: About 32,000 companies worth about USD 3.8 trillion[1]
Average disclosed buyout deal size, 2025: About USD 1.2 billion, a record[1]
Share of global venture funding going to AI companies, 2025: About half[4]
Funding to foundational AI model developers, Q1 2026: About USD 178 billion in one quarter, about double all of 2025[5]

Typical cases(6)

Case prompts you might hear in this industry.

Our private equity client wants to buy this company. Is it a good investment? (commercial due diligence)
How can the new owner raise EBITDA by a third in three years?
What is the most the fund can pay and still earn 2.5 times its money?
Should we roll up small companies in a fragmented market (buy-and-build)?
Should a venture fund invest in this fintech startup?
A fund has held a company for seven years. Should it sell now, list it, or move it to a continuation fund?

Common traps(5)

Mistakes candidates make in this industry, and what to do instead.

Confusing MOIC with IRR. The same 2 times multiple is about 26 percent a year over three years but about 10 percent over seven.
Assuming the company will sell at the same or a higher multiple than was paid.
Forgetting that debt repaid is a source of return, or that debt adds risk if earnings fall.
Paying the seller for synergies that only the buyer can create.
In due diligence, trusting the management plan without testing it against customer interviews and market growth.

What changed, 2024 to 2026(6)

Recent changes a case could turn on.

Deals came back: global buyout deal value rose about 44 percent to about USD 904 billion in 2025, and exit value rose about 47 percent to about USD 717 billion.[1]
Cash back to investors stays scarce: distributions were about 14 percent of fund value in 2025, and about 32,000 unsold companies worth about USD 3.8 trillion wait for an exit, held about seven years on average.[1]
Fundraising got harder: buyout funds raised about USD 395 billion in 2025, down 16 percent, even with about USD 1.3 trillion of dry powder still to invest.[1]
Returns now have to be earned: Bain estimates funds need 10 to 12 percent EBITDA growth a year to reach the returns that about 5 percent delivered in the low-rate decade, which puts pricing, cost and add-on work (and consultants) at the centre.[1]
New exit routes grew: deal volume in the secondary market (funds and fund stakes sold to new investors) rose about 41 percent in 2025, and continuation funds, where a firm sells a company from an old fund to a new one it also manages, grew about 62 percent, though they are still under 10 percent of exit value.[1]
Venture capital is dominated by AI: about half of 2025 venture funding went to AI companies, and foundational model developers raised about USD 178 billion in the first quarter of 2026 alone.[5]

Players by region(9)

Well-known companies in each region. You do not need to learn them by heart; they help you picture the market.

Global: Blackstone, KKR, Apollo, Carlyle, TPG, Bain Capital (private equity)
Sequoia Capital, Andreessen Horowitz, Accel (venture capital)
Europe: EQT (Sweden)
CVC, Permira, Cinven
Ardian (France)
Index Ventures, Atomico (venture capital)
Middle East: Investcorp (Bahrain)
Sovereign investors Mubadala, ADQ and PIF, which co-invest in deals
BECO Capital, Global Ventures, STV (venture capital)
India: ChrysCapital, Kedaara, Multiples
Global firms with India teams
Peak XV Partners, Accel India, Elevation (venture capital)
Southeast Asia: Temasek and GIC (invest directly)
East Ventures, Openspace (venture capital)
United States: Blackstone, KKR, Apollo, Carlyle, TPG
Sequoia Capital, Andreessen Horowitz
China: Hillhouse
PAG (Hong Kong based)
Africa: Helios Investment Partners
Development Partners International
Partech Africa (venture capital)
Latin America: Patria
Kaszek (venture capital)

Words to know(12)

Linked words have a fuller entry in the glossary.

General partner (GP) (glossary entry): The private equity or venture firm that runs the fund and picks the investments.
Limited partner (LP) (glossary entry): An investor in the fund, such as a pension fund or sovereign wealth fund.
Leveraged buyout (LBO) (glossary entry): Buying a company with some equity and a lot of borrowed money.
EBITDA (glossary entry): Earnings before interest, tax, depreciation and amortisation: a rough measure of cash profit from operations.
Enterprise value (EV) (glossary entry): The value of the whole company, shared between its lenders and its owners.
MOIC (glossary entry): Multiple on invested capital: money out divided by money in.
IRR (glossary entry): Internal rate of return: the yearly return rate, which rewards getting money back sooner.
Carried interest (glossary entry): The share of a fund's profit, commonly 20 percent, paid to the firm that runs it.
Hurdle rate (glossary entry): The minimum yearly return investors get before the firm earns carried interest.
Dry powder (glossary entry): Money promised to funds that has not been invested yet.
Commercial due diligence (glossary entry): Checking the market, the competition and the business plan before a fund buys a company.
Continuation fund: A new fund, run by the same firm, that buys a company from one of its older funds.

Business model patterns

The ways of making money this industry follows. Spot the pattern in a new industry and you already know the first questions to ask.

Sources(6)

Facts checked on 30 September 2026. Worked examples are illustrative, shaped by these sources rather than one company's figures.

Go deeper and practise

Go deeper

The full lessons behind this brief, with sources and worked cases.

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Same pattern elsewhere

Industries that make money in a similar way. What you learned here carries over.