Private equity fund
Private equity fund is a
pooled investment vehicleused 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 partnershipswith a fixed term of 10 years (often with annual extensions). At inception, institutional investorsmake 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 partnerand investment advisor). Typically, a single private equity firmwill 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 partnershipsand 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] . CalPERSAlternative 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] . CalPERSAlternative 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
Private Equityfor more information on the private equity asset class.
List of private equity firmsfor a list of the largest active private equity investment firms.
Limited liability company
History of private equity and venture capital
* [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.
* [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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