A private equity fund is a collective investment scheme 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. 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)
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.
- 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 (typically 1 to 2% of the committed capital of the fund.
- Distribution waterfall The process by which the returned capital will be distributed to the investor, and allocated between Limited and General Partner. This waterfall includes the preferred return a minimum rate of return (e.g. 8%) which must be achieved before the General Partner can receive any carried interest, and the carried interest the share of the profits paid the General Partner above the preferred return (e.g. 20%).
- 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.
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