PE Strategies Explained: LBO, Growth Equity, Credit, Infrastructure, and Why the Differences Matter
Michael King, PE Investment Manager · 10 min read · (updated )
- PE encompasses at least five distinct equity strategies (VC, growth equity, LBO, distressed, infrastructure) plus credit strategies (direct lending, mezzanine). Each has different return targets, hold periods, and recruiting pipelines.
- LBO is the default when people say "PE," but growth equity and credit are now larger by capital deployed than traditional buyouts at many firms.
- Post-2006, large buyout fund excess returns over the S&P 500 have been close to zero after fees. The industry's returns increasingly come from operational improvement and sector selection, not financial engineering.
- Your PE strategy preference should inform which firms you target, which groups you work in during banking, and how you frame your "why PE?" answer.
The Five Equity Strategies
| Strategy | What They Buy | Typical IRR Target | Hold Period | Key Return Driver |
|---|---|---|---|---|
| Venture Capital | Early-stage, pre-revenue or early-revenue companies. 50%+ of portfolio companies fail. | 25-30% fund-level (driven by a few winners) | 5-10 years | Revenue growth and multiple expansion at IPO/exit |
| Growth Equity | Proven business models needing capital to scale. Often minority stakes. | 20-30% | 3-7 years | Revenue growth, market expansion, path to IPO |
| Leveraged Buyout | Mature, cash-generative businesses. Majority control (usually 100%). | 20-25% (historically 30%+, now compressed) | 4-7 years | Leverage, EBITDA growth, operational improvement |
| Distressed PE | Companies in financial distress or bankruptcy. Buy debt at a discount, convert to equity. | Highly variable (negative to 50%+ on individual deals) | 2-5 years | Turnaround execution, recovery above purchase price |
| Infrastructure PE | Essential assets: toll roads, power networks, data centres, fibre. Regulated or contracted revenues. | 5-9% (core), 10-14% (core+), 15-20% (value-add) | 10-20+ years | Contracted cash flows, inflation linkage, yield |
The Credit Strategies
PE firms increasingly operate credit strategies alongside equity strategies. Apollo, Ares, and Blue Owl now deploy more capital in credit than in equity buyouts.
| Strategy | What They Do | Return Profile | Risk Level |
|---|---|---|---|
| Direct Lending | Provide senior secured loans directly to companies, replacing traditional bank lending. Fills the gap left by post-2008 bank deleveraging. | 7-12% yield | Lower (senior secured, first claim on assets) |
| Mezzanine | Subordinated debt sitting between senior debt and equity. Often includes equity warrants or conversion features. | 10-15% coupon + equity upside | Medium (subordinated, but contractual payments) |
| Distressed Debt | Buy debt of troubled companies at a discount. Profit from recovery above purchase price, or convert to equity through restructuring. | Highly variable | High (potential for total loss on individual positions) |
LBO: The Default Strategy and Why Returns Have Compressed
When someone says "private equity" without qualification, they mean leveraged buyouts. The classic model: acquire a mature business using 50-70% debt, improve operations over 4-7 years, exit at a higher valuation. Returns come from three sources: EBITDA growth, debt paydown, and multiple expansion.
The historical return picture tells a more complex story than the industry markets:
This has practical implications for PE recruiting: funds increasingly differentiate through operational value creation (cost reduction, revenue initiatives, digital transformation) rather than financial engineering. An analyst who can discuss how a fund creates value operationally, not just how the leverage works, stands out.
Growth Equity: The Fastest-Growing Strategy
Growth equity sits between VC and LBO. The target: companies with proven products and revenue, growing at 20-50%+ per year, that need capital to scale (hire sales teams, expand geographies, fund working capital). Unlike VC, the business model is proven. Unlike LBO, growth is the primary return driver, not leverage.
Key differences from LBO recruiting:
- Minority stakes are common. Growth equity firms often buy 20-40% of a company rather than 100%. This changes the dynamic: you are a partner, not an owner.
- Revenue metrics dominate. ARR growth, NRR, LTV/CAC, and Rule of 40 replace EBITDA and leverage ratios as the primary analytical framework.
- Sourcing matters more. Growth equity deals are often proprietary (the fund finds the company before a banker runs a process). Analysts at growth equity firms spend meaningful time on outbound sourcing, not just evaluating inbound deal flow.
- Consulting backgrounds are more common. Growth equity values operational thinking alongside financial analysis. Former MBB consultants are well-represented.
How Strategy Choice Affects Recruiting
| Strategy | Typical Background | Key Skills Tested | Recruiting Channel |
|---|---|---|---|
| LBO (mega-fund) | BB/EB IB analyst, M&A or LevFin group | LBO modelling, deal experience, investment judgement | On-cycle via headhunters (CPI, Amity, Henkel) |
| LBO (mid-market) | IB analyst (any group), sometimes Big 4 TAS | Same as above, plus operational thinking | Off-cycle, often direct applications + networking |
| Growth equity | IB analyst, MBB consultant, or growth-stage operator | Revenue analysis, SaaS metrics, sourcing ability | Off-cycle, networking-heavy, some headhunter |
| Credit / direct lending | LevFin or DCM analyst, credit analyst | Credit analysis, covenant modelling, downside scenarios | Off-cycle, direct applications |
| Infrastructure | Infrastructure IB, project finance, Big 4 infra advisory | Regulated returns, RAB modelling, long-duration cash flows | Off-cycle, specialist headhunters |
| Distressed | Restructuring IB (Evercore RX, HL, Lazard FR) | Waterfall analysis, fulcrum security, Chapter 11 | Off-cycle, very relationship-driven |
How to Answer "What Type of PE Are You Interested In?"
This question comes up in every PE interview. A weak answer: "I am open to all strategies." A strong answer demonstrates that you understand the landscape and have a reasoned preference.
Example: "I am most interested in mid-market buyouts, specifically in the industrials sector. The combination of operational improvement and financial structuring appeals to me, and the deal sizes allow associates to have meaningful involvement from sourcing through to portfolio company work. I have been following [Fund]'s recent acquisition of [Company], which is a good example of the buy-and-build thesis I find compelling. I am also interested in growth equity as a secondary preference, particularly in B2B software where the recurring revenue dynamics create interesting valuation frameworks."
Take Your Preparation Further
For comprehensive PE interview preparation covering paper LBOs, deal discussions, and investment judgement frameworks, see the PE Interview Masterclass. For the complete PE recruiting timeline and headhunter landscape, download the free PE Recruiting Timeline.
For a deep dive into infrastructure PE specifically, see Infrastructure Private Equity Explained.
Ready for personalised feedback? Book a 1-on-1 mentoring session with an experienced IB/PE professional.
Frequently asked questions
What are the main private equity strategies?
Five equity strategies and three credit ones. On the equity side: venture capital, targeting 25-30% fund-level IRR over 5-10 years and accepting that more than half the portfolio fails; growth equity, 20-30% over 3-7 years, often minority stakes in proven models; leveraged buyout, now 20-25% over 4-7 years; distressed, highly variable over 2-5 years; and infrastructure, 5-9% for core up to 15-20% for value-add over 10-20 years. On the credit side: direct lending at 7-12% yield, mezzanine at 10-15% plus equity upside, and distressed debt.
Is leveraged buyout still the largest private equity strategy?
Not at every firm, and that surprises candidates. LBO remains what people mean when they say private equity without qualification, but growth equity and credit are now larger by capital deployed at many houses. Apollo, Ares and Blue Owl deploy more capital in credit than in equity buyouts. Direct lending in particular has expanded to fill the gap left by post-2008 bank deleveraging.
Have buyout returns actually beaten public markets?
Less clearly than the industry markets. From 1984 to 2006, US buyout funds generated roughly 3% annualised excess return over the S&P 500 net of fees. From 2006 onwards, large buyout fund excess returns over the index have been close to zero after fees. The implication is that returns increasingly have to come from operational improvement and sector selection rather than financial engineering, because leverage alone is no longer scarce.
Why does the choice of strategy matter for recruiting?
Because each has a distinct pipeline, and the answer to 'why private equity' should reflect the one you are targeting. Strategy preference should inform which firms you approach, which group you join in banking, and how you frame your motivation. A candidate targeting infrastructure needs a different banking background and a different stated rationale from one targeting distressed, and interviewers can tell when the answer has been written for private equity generically.