Private Equity (PE Fund)

What is Private Equity?

Private equity is the funds that institutional and retail investors use to acquire public companies or invest in private companies. In simple words, private equity is just Capital or shares of ownership that are not publicly traded or listed unlike stocks. These funds are typically used in acquisitions, expansion of business, or strengthen a firm’s Balance Sheet.

Once the funds are exhausted, the private equity fund can raise a second round of capital funding, or it can have several funds going on at the same time. PE firms are not the same as venture capital firms because they are not Investing in public firms, but they invest solely in private firms, even if they are already established and globally known. Also, PE firms may finance their investments with debt and participate in a leveraged buyout.

When creating private equity, investors will raise capital to invest in private companies -- to either facilitate mergers and acquisitions, stabilize the company's balance sheet, raise new working capital, or instigate new projects or developments -- and that capital is often contributed by accredited or institutional investors.

Characteristics Private Equity Fund

Here are some key characteristics and components of a private equity fund:

• Limited Partners (LPs): These are the investors who provide capital to the fund. Limited partners typically include institutional investors like pension funds, Insurance companies, and wealthy individuals. Limited partners have limited liability and are not directly involved in the day-to-day management of the fund's investments.

• General Partners (GPs): The general partners are the professional investment managers or private equity firms responsible for managing the fund. They make investment decisions, conduct due diligence on potential investments, and actively manage the Portfolio companies. GPs typically receive management fees and a share of the fund's profits, known as Carried Interest, as compensation.

• Capital Commitments: Investors commit a certain amount of capital to the fund, but they may not need to contribute the entire amount upfront. Instead, they make capital contributions as needed when the fund identifies investment opportunities.

• Fund Structure: Private Equity Funds are typically structured as limited partnerships. This structure provides liability protection for limited partners, with the general partners bearing the primary responsibility for the fund's activities.

• Investment Focus: Private equity funds may have specific investment strategies or focuses, such as buyouts (acquiring a controlling stake in a company), growth capital (investing in companies to help them expand), distressed assets, venture capital, or sector-specific investments.

• Fund Lifecycle: Private equity funds have a defined lifecycle, which typically spans several years (e.g., 7-10 years). During this time, the fund makes investments, actively manages portfolio companies, and eventually exits these investments to realize returns for investors. Once the fund's investments are fully exited, it is typically dissolved, and the remaining proceeds are distributed to investors.

• Illiquidity: Investments in private equity funds are Illiquid, meaning that investors typically cannot easily sell their stakes before the fund's planned exit or dissolution.

Private equity funds play a significant role in the financial markets, as they provide a source of capital and expertise for private companies, contribute to job creation and Economic Growth, and offer investors the potential for attractive returns, albeit with higher risks and longer investment horizons compared to public equity investments.