Private Equity Fund Structure | A Simple Model (2024)

FAQs

What is the typical structure of a private equity fund? ›

Fund Structure: Private equity funds are typically structured as limited partnerships. The GP acts as the general partner of the limited partnership, while the investors become limited partners. This structure provides tax advantages and limits the liability of the LPs.

The common GP vs. LP legal structure establishes voting rights, legal remedies, and profit-sharing provisions between the GP as the managing entity of the investment and LPs as passive investors in the investment. The GP vs. LP dynamic is common in both private equity and real estate investing.

What Is Private Equity (PE) And How Does It Work? Definition of Private Equity: Private equity firms raise capital from outside investors, called Limited Partners (LP), and then use this capital to buy companies, operate and improve them, and then sell them to realize a return on their investment.

Private equity is ownership or interest in entities that aren't publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges.

80% of your returns will usually come from 20% of your investments. 20% of your investors will usually represent 80% of the capital. For portfolio companies. 20% of your customers will usually represent 80% of your profits.

This is also known as the “2 and 20” fee structure and it's a common fee arrangement in private equity funds. It means that the GP's management fee is 2% of the investment and the incentive fee is 20% of the profits. Both components of the GPs fees are clearly detailed in the partnership's investment agreement.

A private equity deal structure example of this is when a company dealing with home appliances is willing to expand its business and has a 100,000-dollar cash flow every year. The company can be liable to get a loan of 180,000 dollars to support its development after being leveraged to its annual earnings.

Greater control: GPs have direct control over the investment's decision-making processes, allowing them to implement their strategies and execute the business plan according to their expertise. Potential for higher returns: GPs can earn higher returns than LPs due to their active involvement in the investment.

The life cycle of a typical private equity fund is usually ten years, but that ten years generally doesn't start until the team raises substantial capital and it doesn't end until all assets are sold. So, the life cycle of a private equity fund may stretch to as long as 15 years.

Private equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors.

What does private equity work look like? ›

Private equity operates with investors and uses funds to invest in private companies or buy out public companies. By doing so, general partners can obtain control over management and other operational changes to increase profitability in hopes to later sell at a successful rate.

How funds of funds work in private equity. The structure of a fund of funds is a limited partnership, similar to that of an individual private equity fund. There is a general partner that operates the FoF and manages the investments, while the limited partners provide the investment capital.

Private equity fund structure

The fund is managed by a private equity firm that serves as the 'General Partner' of the fund. By contributing capital, investors become 'Limited Partners' of the fund. As such, the fund is structured as a 'Limited Partnership'.

Private equity firms make money through carried interest, management fees, and dividend recaps. Carried interest: This is the profit paid to a fund's general partners (GP).

PE operates by investing in privately-held companies with the goal of generating substantial returns. Private equity firms raise funds from Limited Partners (LP) forming a pool of capital. These firms then identify promising investment opportunities, conduct due diligence, and select companies with growth potential.

Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”).

Equity can be further subdivided into four components: shareholder loans, preferred shares, CCPPO shares, and ordinary shares. Typically, the equity proportion accounts for 30% to 40% of funding in a buyout. Private equity firms tend to invest in the equity stake with an exit plan of 4 to 7 years.

These funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%). The performance fee, also known as carried interest, is taxed at the long-term capital gains rate.