Introduction

A private equity firm raises a fund from limited partners — pensions, endowments, sovereign funds, family offices — and invests it in private companies, usually taking control. It improves those companies over three to seven years and sells them. The firm is paid a management fee on committed capital and a share of profits, called carried interest, once investors have received their money back plus a hurdle return.

Everything a PE professional does serves that cycle: raise, invest, improve, exit, return cash, raise again. A track record of returned cash is what lets a firm raise its next fund.

Two measures dominate. The multiple of invested capital (MOIC) says how many times the money came back. The internal rate of return (IRR) says how fast. A 3x return over ten years is a weak IRR; a 2x over three years is excellent. Investors care about both, plus distributions to paid-in capital (DPI), which counts only cash actually returned.

The classic structure is '2 and 20': a 2% annual management fee and 20% of profits above an 8% preferred return. Larger funds often charge lower fees. Carry is what makes partners wealthy, so incentives are tied to exit outcomes rather than fund size alone.

PE offers ownership of decisions: you help decide what to buy, how much to pay and what to change. Compared with banking, hours are more predictable outside live deals, the work is more investment-focused, and pay includes carry that can be large over a career.

Firms hire associates who can model fast and accurately, think critically about a business, and communicate a view. Above all they want skepticism: management forecasts and banker books are optimistic by design, and the associate is the first line of defence.