Private equity (PE) refers to capital investment made into companies that are not publicly listed or traded, and the capital mainly comes from institutional investors, such as pension funds, and accredited investors who are financially sophisticated enough to bear the risks. Most companies start off as private with the goal of going public someday; some public companies can also sell out their public shares if they see more benefits in the private sector. In both situations, the offerings of private equity firms can help.

Imagine you are starting a new private equity firm. You, as a general partner (GP), intend to raise a private equity fund of $300 million. With that fund, you plan to invest in companies you have identified and researched. After these investments are exited, you will distribute returns to your investors, limited partners (LPs). These distributions are unlikely to happen for several years. In other words, the LP capital is locked into the fund for many years.

Why do you think this illiquidity is a characteristic of PE investments?