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

Diagram of the structure of a generic private equity fund

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 operations¹

• 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 investors¹

• 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:

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

• Private equity – a guide for pension fund trustees. Pensions Investment Research Consultants (PIRC) for the Trades Union Congress.

• Krüger Andersen, Thomas. Legal Structure of Private Equity Funds. Private Equity and Hedge Funds 2007.

• Prowse, Stephen D. The Economics of the Private Equity Market. Federal Reserve Bank of Dallas, 1998.

v • d • e Topics on private equity and venture capital Basic investment types Buyout • Venture • Growth • Mezzanine • Secondaries • Equity co-investment History History of private equity and venture capital • Early history of private equity • Private equity in the 1980s • Private equity in the 1990s • Private equity in the 21st century Terms and concepts Buyout Financial sponsor • Management buyout • Divisional buyout Venture Seed money • Startup company • Angel capital • Angel investor • Venture capital financing • Pre-money valuation • Post-money valuation • Venture round • Venture debt Structure Private equity firms and funds • Limited partnership • Limited liability company • Carried interest • Publicly traded private equity • Private Investment in Public Equity (PIPE) Investors Institutional investors • Pension funds • Insurance companies • Endowments • Fund of funds • High net worth individuals • Sovereign wealth funds Related financial terms Initial Public Offering (IPO) • Mergers and acquisitions • Leverage • High-yield debt • Capital structure Private equity and venture capital investors • Private equity firms • Venture capital firms • Portfolio companies

External links

• The Economics of Private Equity Funds (University of Pennsylvania, The Wharton School, Department of Finance)
• CalPERS Private Equity Industry Dictionary
• VC Experts Glossary (Glossary of Private Equity Terms)
• Guide on Private Equity and Venture Capital for Entrepreneurs (European Venture Capital Association, 2007)
• UK Venture Capital and Private Equity as an Asset Class (British Venture Capital Association)
• Note on Limited Partnership Agreements (Tuck School of Business at Dartmouth, 2003)