Private Equity Fund, Private Equity Funds

By: EconomyWatch   Date: 31 July 2009

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A private equity fundis a pooled capital source through which investors can invest in various equities (stocks). These funds raise capital from sources such as banks, insurance companies, pension funds and wealthy individuals. 
 

Private Equity Fund: Structure

Private equity funds are structured as fixed-term limited partnerships. This partnership consists of:

  • A General Partner (GP). This is usually a private equity firm which raises capital and manages the private equity fund.

  • Investors who act as limited partners (LPs).

 

This limited partnership is governed by the terms set in the limited partnership agreement (LPA):

  • Partnership term: The term of these limited partnerships is ten years, which can be extended at the end of each year.

  • Management fees: This fee is an annual payment made by investors to the fund's manager. This fee is the payment for the investment operations conducted by the private equity firm and is usually 1% to 2% of the committed capital of the fund.

  • Carried interest: This is the share of profits from the fund's investments that is paid to the private equity firm as a performance incentive. This is usually up to 20% of the profits earned. The remaining 80% of the profits are distributed among the fund's investors.

 

Private Equity Fund: How is it Managed?

A private equity fund is used by the private equity firm to buy assets such as:

  • An entire enterprise, which is usually a company listed on a stock exchange.

  • A part of a listed company. This part could be a division, a production facility or a regional operation.

  • A company’s infrastructure.

 

Private equity funds aim at generating substantial returns for investors. The private equity firm fulfills this aim by disposing the fund’s assets through:

  • Unit by unit sale

  • Sale to another fund or a competing enterprise

  • Listing of company on a stock exchange

 

The returns on investment for a private equity fund are dependant on the following factors:

  • If the fund could receive substantial income through dividends during the period of ownership.

  • Whether the overall assets could be sold at a premium.

  • Whether the market perceptions of the assets have changed and if the fund could float the enterprise.

 


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