A private equity fund is a type of collective investment vehicle that pools cash from multiple investors to invest in private firms or assets. It is a collective investment scheme that invests in various equity (and to a lesser extent debt) securities in accordance with one of the private equity investment methods. Private equity firms, which are professional investment management businesses, generally manage these.
Private equity funds are typically limited partnerships with a 10-year tenure (frequently with annual extensions). These funds are a sort of alternative investment that are known for investing in various stages of a company’s life cycle, ranging from startup and early-stage investments to mature and often distressed enterprises.
At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From the investors’ point of view, funds can be traditional (where all the investors invest with equal terms) or asymmetric (where different investors have different terms).
Here are key characteristics and aspects associated with private equity funds:
- Investment Strategy: Private equity firms frequently participate in leveraged buyouts, in which they acquire a controlling stake in a company. Some funds specialize in investing in early-stage and growth-stage enterprises, providing starting cash.
- Limited Partners (LPs) and General Partners (GPs): These are the people who put money into the fund. They are passive investors with little involvement in fund management. These are the fund managers who are in charge of making investment decisions and running the fund. GPs frequently invest their own funds with LPs.
- Fund Structure: Private equity funds typically have a fixed lifespan, known as the fund’s “term,” which is usually around 10 years. During this period, GPs actively manage the fund’s investments. The fund may have a specified investment period during which it makes new acquisitions, followed by a divestment period when it sells or exits investments.
- Fundraising: Private equity funds raise capital through the sale of limited partnership interests to institutional investors, high-net-worth individuals, and other qualified investors.
- Leverage: Private equity funds often use a combination of their own capital and borrowed money (leverage) to finance acquisitions. The goal is to enhance returns, but it also increases risk.
A private equity fund is established and managed by investment experts from a specific private-equity firm (the general partner and investment adviser). Typically, a single private-equity company would manage a series of unique private-equity funds and will aim to raise a new fund every 3 to 5 years once the preceding fund is fully invested.
Private equity plays an important role in the financial markets by giving funding to companies that may not have access to public markets or traditional financing. However, private equity investments are illiquid and require a longer investment horizon than public market assets.
