Private equity funds are a collective investment vehicle that operates similarly to mutual funds and hedge funds. They pool investors together to manage private investments that meet the fund’s specific criteria. A private equity fund is typically invested in one or more companies to return capital to investors and increase their assets over time.
Below are the components of a private equity fund.
General Partners (GPs)
The general partners are typically the investors who control the private equity fund. They are also in charge of allocating capital to projects within the fund. Within these projects, a selected management team will have complete control over day-to-day decisions within that specific project. The general partner will oversee day-to-day operations, including decision-making by the management team. According to capital partners like Peter Comisar, a private equity firm must maintain strong business ethics because of the relationship between general partners and management teams.
Management Teams
A management team may be composed of both internal and external members. There is typically a manager or general partner in charge of day-to-day operations within this team. A CFO and COO are often responsible for financial decisions and processes, respectively. External members within the management team include an investment manager. The manager works with the investors to identify opportunities for growth in companies within the fund’s portfolio. Another outer member may be a property manager who works with real estate investments, while others focus on manufacturing, technology, and more.
Information for Investors
The information for investors section of the private equity fund’s structure will detail that each investor is considered small about the funds as a whole. There is a lower expected return on investment than large private equity firms investing in public markets. The track record of funds within the fund will also be included within this section. There are benefits to investing within the funds since they are typically low-cost with higher returns. They usually offer other perks such as lower fees than public market investments.
Investment Strategies/Returns
The investment strategies section of a private equity fund’s contract will detail how the fund invests those funds. This section of the agreement will spell out the fund’s performance goals concerning each company supported and how and when returns are expected. Within this section, it is important to remember the two common investment strategies provided within the structure of a private equity fund, buy and hold and buy and flip. A typical buy and hold strategy involves keeping some of the cash generated by a company while investing in other companies that may offer similar returns as the first company. A buy and flip strategy work differently. It involves acquiring a controlling interest in a company then selling that interest to an outside party or another investor once performance goals have been met.
Private equity funds are attractive to firms who wish to invest their money in a company that has yet to be publicly traded. Some of the most successful private equity firms have portfolio companies. To participate in a private equity fund, you must sign on as an investor and commit your capital.