- Equity investments in private markets
- What is an equity investment?
- How private market equity differs from public stocks
- Types of equity interests in private companies
- How are equity investments structured?
- Structuring deals with funds and special purpose vehicles
- The role of the limited partnership agreement
- Managing the private equity investment lifecycle
- Closing the deal and onboarding investors
- Valuing and monitoring portfolio companies
- Accounting for investments and reporting to LPs
- Managing liquidity and realizing returns
- The operational challenges of managing equity investments
- Maintaining a single source of truth from cap table to fund
- Ensuring audit readiness and compliance
- Delivering transparency to limited partners
- A connected platform for the entire investment lifecycle
- Frequently asked questions about equity investments
- What are examples of equity investments in private markets?
- How do LPs evaluate equity as an investment?
- What is the difference between an equity stake and return on equity (ROE)?
What is an equity investment?
An equity investment is the purchasing of an ownership interest in a private company. In exchange for capital, you receive a share of the business, called equity, which gives you a claim on its future profits and assets. For equity investors in venture capital (VC) and private equity (PE) firms, these investments are the core assets that drive fund performance and returns for their investors.
Unlike a simple loan where you are just a lender, an equity investment makes you a part owner. This means you share in both the potential upside and the risks of the business. If the company succeeds and its market value grows, the value of your equity investment increases. If the company fails, your investment could be lost entirely.
How private market equity differs from public stocks
While both involve ownership, making an investment in a private company’s equity is fundamentally different from buying shares of a public company on a stock exchange. These differences create unique challenges and opportunities for you as an investor, particularly around how investments are valued, managed, and eventually sold during liquidity events. Understanding this distinction is key to navigating the world of private capital.
This contrast also explains why private market investing requires specialized operational expertise and technology. The lack of daily pricing and public information demands a more hands-on approach to tracking performance and managing risk. Private market equity investments are typically illiquid and held for years before a sale or exit—a long-term horizon often shielded from the daily volatility of public markets. This long-term horizon is reflected in executive compensation structures: From 2022 to 2025, 42.8% of PE-backed corporations used four-year vesting with a one-year cliff and monthly vesting, while 44% of non-PE-backed corporations followed the same pattern.
From the perspective of a fund manager investing in a portfolio company:
Feature | Public market stocks | Private market equity |
Liquidity | High; can be bought or sold daily on a stock market. | Low; investments are illiquid and held for many years. |
Valuation | Priced daily by the market. | Valued periodically through complex, private assessments. |
Information | Highly regulated with public financial disclosures. | Information is private and access is limited. |
Investor role | Typically passive. | Often active, with board seats and operational influence. |
Types of equity interests in private companies
An equity investment in a private company is more complex than just buying a share of public company stock. The type of equity you receive is defined in legal documents and determines your rights, including your priority for repayment in a sale or liquidation. Different types of equity are used in different situations to balance the needs of management teams, employees, and investors.
The choice between these equity types is a key part of structuring a deal, as it impacts everything from tax treatment to control. As explained during Carta’s Lifecycle of a PE Deal webinar, the structure is often driven by tax advantages for the management team, with profits interests being a popular choice in LLCs over traditional management equity like stock options in C corporations. Profits interests are a common form of management equity in PE-backed LLCs.
Common stock: This is the most basic form of ownership and includes founder shares typically held by the original team and employees. It usually comes with voting rights, which allow holders to have a say in company decisions, but it is last in line for payment if the company is sold or liquidated. This means that in an exit event, all other debt holders and preferred stockholders get paid before common stockholders see any return.
Preferred stock: This is the security most often issued to investors in a VC financing. Preferred stock includes special rights and protections, such as liquidation preferences, which ensure investors get their money back before common stockholders in an exit. These preferences are key negotiating points in a funding round and provide downside protection for you as the investor.
Profits interest units (PIU): Often used in companies structured as limited liability companies (LLC), a profits interest is a form of management equity that grants the holder a share of the company's future growth in value. This aligns the holder's incentives with the company's performance without granting them ownership of the company's current value. This can be a tax-efficient way to compensate key employees and partners, as the value is tied to future appreciation.
How are equity investments structured?
To make large, long-term equity investments in private companies, fund managers pool capital from multiple investors, known as limited partners (LP). This capital is gathered into private investment funds, which are specialized legal entities designed to make and manage these investments. This structure allows your investors to diversify their risk across multiple deals and benefit from your expertise as the fund manager.
The two primary structures you'll use for this purpose are the traditional investment fund and the more targeted special purpose vehicle (SPV). Each serves a different strategic purpose, offering you flexibility in how you deploy capital and capture opportunities.
Structuring deals with funds and special purpose vehicles
An investment fund is a vehicle used to deploy capital across a portfolio of companies that fit a predefined investment strategy and specific investment objectives. Traditional funds remain the standard structure for established investors, allowing them to build a diversified portfolio over several years, while SPVs are often a stepping stone for emerging fund managers building a track record before raising a full fund.
An SPV, by contrast, is a legal entity created to make a single, specific investment. Emerging managers might use an SPV to build a track record, or an established fund might use one for a co-investment or a deal that falls outside its main fund's investment thesis and allocation strategy. For example, PE firm Bochi Investments uses Carta SPVs to efficiently capture compelling opportunities without the overhead of a full fund, allowing it to invest in promising companies earlier than larger firms.
The role of the limited partnership agreement
The foundational legal document for any fund or SPV is the limited partnership agreement (LPA). The LPA is the rulebook that governs the relationship between you as the fund manager, known as the general partner (GP), and your investors, the LPs. It outlines the rights and responsibilities of each party, ensuring everyone is on the same page.
Critically, the LPA dictates the terms for making equity investments and guides portfolio management by setting the fund's investment period, limits on how much can be invested in a single company, and how profits will be calculated and distributed. A well-constructed LPA, often created through a streamlined fund formation process, is essential for setting a fund up for long-term success and maintaining alignment between you and your LPs.
Managing the private equity investment lifecycle
From your fund's perspective, an equity investment is an ongoing process that spans years. This journey, from initial investment to final exit, is known as the investment lifecycle. Each stage presents distinct operational challenges for your fund's finance team, led by the CFO or controller.
Managing this lifecycle effectively requires a combination of financial acumen, legal expertise, and robust operational infrastructure, especially as regulators enhance their oversight of private fund advisors as part of broader investor protection efforts. Your goal is to maximize the investment's value while ensuring compliance and transparency for all stakeholders.
Closing the deal and onboarding investors
The lifecycle begins when your fund finalizes an investment. This administrative process involves executing legal documents, calling capital from LPs to fund the investment, and wiring the funds to the portfolio company for their equity management needs.
Despite the availability of digital tools, many PE firms may still rely on manual, paper-based processes, involving wet-ink signatures on subscription documents and cumbersome tracking spreadsheets. This may be slow, be prone to errors, and create a poor first impression for your new investors. A digitized closing process streamlines these workflows, allowing your LPs to sign documents and fund their commitments through a secure online portal.
Valuing and monitoring portfolio companies
Unlike public stocks, your PE investments do not have a daily market price. You are required by accounting standards, such as ASC 820, to determine the fair value of your investments on a regular basis, typically quarterly.
A major challenge in portfolio monitoring is collecting dependable information, especially because consistent and reliable data on PE-backed companies can be notoriously difficult to find. This data is often scattered across different formats and systems, making it difficult to ensure accuracy and calculate an accurate net asset value (NAV) for the fund.
A disorganized cap table at the portfolio company level creates downstream chaos for your fund’s valuation, accounting, and LP reporting processes. To produce audit-defensible valuations with confidence, you need a clear, connected system.
This data is often scattered across different formats and systems, making it difficult to ensure accuracy. An integrated valuations service that connects directly to portfolio company equity management software solves this problem, allowing you to produce audit-defensible valuations with confidence.
Accounting for investments and reporting to LPs
The value of each equity investment must be accurately recorded in your fund's general ledger (GL). This information flows into key financial statements, such as the schedule of investments (SOI) and the Partners' Capital Account Statement (PCAP), which you share with your LPs.
When your fund accounting relies on stale data from disconnected systems, it undermines the accuracy of your financial reports and erodes investor trust. A modern PE software with an event-based GL acts as the single source of truth, ensuring data is consistent from the portfolio company's cap table to the final report an LP receives.
Managing liquidity and realizing returns
The investment lifecycle concludes when your fund exits the investment to return capital and profits to your LPs. The primary exit strategies are a merger or acquisition (M&A), an initial public offering (IPO), or secondary transactions regarding the fund's stake.
Calculating how proceeds from an exit are distributed is incredibly complex. The distribution waterfall dictates the order and amount of distributions to LPs and the GP and requires a system that has accurately tracked every capital flow. An integrated system that serves as a single record for all fund activities ensures that distributions are calculated correctly.
The operational challenges of managing equity investments
The complexities of the investment lifecycle create significant operational hurdles for you and your finance professionals. These challenges, if not addressed with modern technology and processes, can lead to costly errors, compliance risks, and strained investor relations. Synthesizing these challenges reveals three core pain points that resonate across the PE industry.
Maintaining a single source of truth from cap table to fund
As a fund manager, you often find yourself managing critical data across a patchwork of disconnected tools. This can include spreadsheets for portfolio tracking, separate software for cap table management, and another system for fund accounting. Fund managers often operate across fragmented systems and service providers; for the median VC fund over $100 million, legal fees make up 22.7% of operating expenses in the first five years and tax fees another 6.1%, underscoring the complexity of core fund economics.
This fragmentation is a primary source of operational chaos. It leads to manual, repetitive data entry, which is not only inefficient but also creates a high risk of errors and results in stale data that undermines your confidence in the fund's financial reporting.
Ensuring audit readiness and compliance
The annual fund audit is a high-stakes process where accounting and valuations are scrutinized. Auditors require a clear, defensible evidence trail for every number in your financial statements, as records must be readily available for SEC examinations to prove actual compliance.
When documentation is scattered across emails, shared drives, and various software systems, preparing for an audit becomes a painful and time-consuming exercise. Audit prep becomes more time-consuming when records are scattered and equity administration is frequent: complex vesting schedules add administrative burden, and 63% of initial equity grants to management teams at PE-backed corporations vest monthly. This lack of centralized control and documentation makes it difficult to respond to auditor requests promptly and navigate the audit with confidence.
Delivering transparency to limited partners
In today's market, your LPs are demanding more frequent, detailed reporting, especially around distributions to paid-in capital (DPI) visibility, which has become the critical metric in a market where exits are rarer. They expect institutional-grade reporting that provides clear insight into how their capital is being managed.
This demand for DPI transparency, combined with the complexity of calculating liquidity metrics, has become a major administrative burden for fund finance teams. The manual process of gathering data, creating reports in spreadsheets, and distributing them via email distracts your team from more strategic, value-added work like analysis and forecasting.
A connected platform for the entire investment lifecycle
The solution to these operational challenges lies in a single, integrated platform that serves as the operating system for private companies and capital. Instead of a collection of siloed products, a connected platform unifies fund administration, portfolio management, and investor reporting into one seamless workflow.
This network approach connects funds, their portfolio companies, investors, and employees on a single infrastructure. By automating manual tasks and creating a single source of truth for all data, this platform empowers you and your fund professionals to transform your role.
You can move from being bogged down in back-office administration to becoming strategic partners who drive fund performance and deliver unparalleled transparency to your stakeholders.
To see how Carta’s platform can support your firm, request a demo.
Frequently asked questions about equity investments
What are examples of equity investments in private markets?
Common examples include a VC fund making a Series A investment in a technology startup or a PE fund executing a buyout on an established, family-owned manufacturing business.
How do LPs evaluate equity as an investment?
LPs typically assess equity based on fund performance metrics, often ranking funds within their vintage year by internal rate of return (IRR) and multiple on invested capital (MOIC), to evaluate returns and provide portfolio diversification while carefully weighing risks such as the lack of liquidity and long investment horizons. While past performance is not a guarantee of future results, it is a key factor LPs use to evaluate returns and provide portfolio diversification.They may also compare these to other asset classes like real estate or public equity.
What is the difference between an equity stake and return on equity (ROE)?
An equity stake represents an investor's ownership percentage in a company, whereas return on equity (ROE) is a financial metric that measures a company's profitability in relation to the equity invested. In public markets, ROE can impact the share price, but in private markets, it is used to measure how effectively the business uses shareholders' equity on its balance sheet.
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