Private equity fund


Private equity fund

Private equity fund is a pooled investment vehicle used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years (often with annual extensions). At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund.

A private equity fund is raised and managed by investment professionals of a specific private equity firm (the general partner and investment advisor). Typically, a single private equity firm will manage a series of distinct private equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested.

Legal Structure and Terms

As discussed, most private equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement or LPA. Among the terms set forth in the limited partnership agreement are the following:

* "Term of the partnership" – the partnership is usually a fixed-life investment vehicle that is typically 10 years plus some number of extensions

* "Management fees" – an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations [http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/pe-glossary.xml Private equity industry dictionary] . CalPERS Alternative Investment Program]

* "Carried interest" - a share of the profits of the fund (typically up to 20%), paid to the private equity fund’s management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors [http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/pe-glossary.xml Private equity industry dictionary] . CalPERS Alternative Investment Program]

* "Hurdle Rate" or "preferred return"– a minimum rate of return which must be achieved before the fund manager can receive any carried interest payments

* "Transfer of an interest in the fund" – private equity funds are not intended to be transferred or traded, however they can be transferred to another investor. Typically, such a transfer must receive the consent of and is at the discretion of the fund's manager

* "Restrictions on the General Partner" - the fund's manager has significant discretion to make investments and control the affairs of the fund. However, the LPA does have certain restrictions and controls and is often limited in the type, size or geographic focus of investments permitted and how long the manager is permitted to make new investments

Private equity funds and private equity firms: an illustration

The following is an illustration of the difference between a private equity fund and a private equity firm:

Private Equity Firm

Private Equity Fund

Private Equity Portfolio Investments (Partial List)

Kohlberg Kravis Roberts & Co. (KKR)

KKR 2006 Fund, L.P.
($17.6 billion of commitments)

Alliance Boots

Dollar General

Energy Future Holdings Corporation

First Data Corp

Hospital Corporation of America (HCA)

Nielsen Company

NXP Semiconductors

See also

* Private Equity for more information on the private equity asset class.
* List of private equity firms for a list of the largest active private equity investment firms.
* Limited partnership
* Limited liability company
* History of private equity and venture capital
* Hedge fund

References

* [http://www.tuc.org.uk/extras/peguide.pdf Private equity – a guide for pension fund trustees] . Pensions Investment Research Consultants (PIRC) for the Trades Union Congress.

*Krüger Andersen, Thomas. [http://isis.ku.dk/kurser/blob.aspx?feltid=155330 Legal Structure of Private Equity Funds] . Private Equity and Hedge Funds 2007.

*Prowse, Stephen D. [http://www.dallasfed.org/research/er/1998/er9803c.pdf The Economics of the Private Equity Market] . Federal Reserve Bank of Dallas, 1998.


External links

* [http://www.chicagogsb.edu/research/workshops/finance/docs/metrick-pe.pdf The Economics of Private Equity Funds] (University of Pennsylvania, The Wharton School, Department of Finance)
* [https://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/pe-glossary.xml CalPERS Private Equity Industry Dictionary]
* [http://vcexperts.com/vce/library/encyclopedia/glossary_download.asp?format=html VC Experts Glossary] (Glossary of Private Equity Terms)
* [http://www.evca.eu/uploadedFiles/Home/Toolbox/Introduction_Tutorial/EVCA_PEVCGUIDE.pdf Guide on Private Equity and Venture Capital for Entrepreneurs] (European Venture Capital Association, 2007)
* [http://www.bvca.co.uk/publications/assetclass/assetclassfull.pdf UK Venture Capital and Private Equity as an Asset Class] (British Venture Capital Association)
* [http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LPA.pdf Note on Limited Partnership Agreements] (Tuck School of Business at Dartmouth, 2003)


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