Private equity firms are an indispensable source of financing for start-ups or established companies with no access to securities exchanges or private financing markets. A private equity firm, or fund, raises cash from financial institutions, such as banks, hedge funds and insurance companies, and engages in short-term or long-term investments.

Private Versus Public Equity
Private equity means equity (investment) raised through private investors and organizations. For instance, a New York-based private equity firm seeking to raise $1 billion may contact high net worth individuals, banks, university endowment funds, insurance companies and mutual funds. Public equity means cash raised on securities exchanges from sales of stocks, bonds, convertible bonds and preferred shares. A company must be listed on a securities exchange to raise cash equity.

Private Equity Fund Defined
A private equity fund is an investment pool (investments from various partners) that is not traded on a financial market. A private equity fund's manager typically partners with an investment banker to evaluate economic trends or changes in international marketplaces, and assesses fundraising opportunities from investors. For example, the New York-based private equity's manager may hire an investment banker to help explain the fund's investment objectives to potential private and institutional investors.

Significance
A private equity fund plays a significant role in modern economies because it provides financing for start-ups or firms that have no access to securities markets. To illustrate, the founder of a social networking website believes her company has potential to grow and could be profitable in three years. However, the firm cannot raise funds on the stock market. She may receive funding from a private equity firm.

Types
Types of private equity funds may vary, depending on the fund's investment strategy, risk profile, location and size. A private equity fund may focus on an industry, such as financial services or oil and gas. Another fund may target a sector within an industry. For instance, a fund may invest only in retail and investment banks within the financial services industry. A private equity fund also may invest based on geography, and may focus on a country, region or continent.

Considerations
Although most funds have similar operating methods--that is, they conduct business the same way--a private equity fund is distinct from other funds. A mutual fund may raise financing only from individual investors and could be traded on a securities exchange such as the New York Stock Exchange (NYSE). A hedge fund focuses it fundraising efforts on high net-worth individuals and families as well as financial institutions such as banks and university endowment funds. A fund of funds is a hedge fund that invests in other hedge funds. Hedge funds and funds of funds are not traded publicly.