What is private equity?

The strategies inside the label

"Private equity" is an umbrella, and the strategies underneath it behave very differently.

Buyout acquires control — typically a majority or the whole company — usually with debt in the structure. Returns come from improving the business, paying down that debt, and selling at a higher multiple than was paid.

Growth equity takes a minority stake in a company that already works and needs capital to expand. No control, no leverage, and returns come from the company getting larger. This is the strategy most African mid-market businesses actually encounter; what is growth capital covers it in full.

Special situations and turnaround buys businesses in difficulty at a discount, on the expectation of fixing them. Higher risk, more operationally intensive, and a different skill set entirely.

Secondaries buys existing stakes from other investors rather than investing new money into companies — a way of providing liquidity in an asset class that otherwise has very little.

How leverage works, and how it turns

Leverage is the mechanism most associated with buyouts and the least understood outside them. If a fund buys a company for 100 using 50 of its own capital and 50 of borrowed money, and later sells for 130 having repaid the debt, its 50 has become 80. The same purchase made entirely in cash would have turned 100 into 130. Leverage multiplied the return on the equity without the business performing any differently.

It multiplies in both directions. If that company sells for 70 instead, the debt is still repaid in full first, and the equity absorbs the entire shortfall. This is why leveraged structures demand predictable cash flow above almost anything else: the interest must be serviceable in a bad year, not just an average one.

Leveraged buyouts are comparatively rare in African markets, because the acquisition debt they depend on is thinly available and expensive. Most African private equity is therefore growth-oriented and minority, which is a structural fact worth knowing before assuming that what is written about the asset class elsewhere describes what is on offer here.

What changes when an investor takes control

A minority investor influences. A control investor decides. The practical differences arrive quickly: management appointments become a board matter, capital allocation is set by an owner with an exit date, and the founder — if they remain — is now an employee with equity rather than a proprietor.

That is not automatically a loss. Control investors bring capability that most owner-managed businesses lack: institutional-grade finance functions, procurement leverage, acquisition capacity, and governance that survives the founder. Businesses frequently become materially more valuable under that discipline.

But it should be entered deliberately. The most difficult conversations we see are not about price. They are with founders who sold control while assuming that day-to-day life would continue unchanged, and discovered otherwise around month four.

The holding period, and why it drives behaviour

Private equity funds hold investments for roughly three to seven years, because they must return capital to their own investors within the fund's life. That clock shapes everything.

It explains why an investor will pursue an acquisition in year two but not year six. Why capital expenditure with a ten-year payback is a hard argument late in a holding period. And why exit preparation begins far earlier than founders expect — a business is being made saleable from the moment it is bought.

It also creates a genuine alignment worth naming. Both the investor and the founder are working toward the same event, and the investor has usually done it before. For a founder who intends to sell eventually, that experience is one of the more valuable things in the package.

What a private equity investor looks for

The tests are almost the inverse of a venture investor's. Predictable cash flow comes first, because it services debt, funds growth and underwrites the valuation. Market position matters more than market size — a defensible share of a modest market beats a fragile share of a vast one. Management depth is scrutinised hard, because an investor buying a business that depends entirely on its founder is buying a risk it cannot diversify.

Then two questions founders rarely anticipate. Is there a plausible buyer in five years? An investor is underwriting its own exit from the first meeting, and a business with no obvious acquirer is difficult to price. And what is the value-creation plan? Not the founder's plan — the investor's. Buy-and-build acquisitions, margin improvement, a new geography, professionalised finance. If an investor cannot articulate what they will do that the business would not do alone, they are simply paying for what exists, and that rarely clears their return threshold.

How the money is raised in the first place

A private equity firm invests other people's money. Pension funds, insurers, endowments, development finance institutions and family offices commit capital to a fund, and the firm deploys it under an agreed mandate.

This matters to a business on the receiving end, because the mandate is not infinitely flexible. A fund with a defined sector, geography, cheque size or impact requirement cannot simply make an exception for an attractive opportunity outside it. When an investor says a business is not a fit, that is frequently a literal statement about their mandate rather than a polite decline. Fund structures explains how those constraints are set.