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Private equity fund
A private equity fund (PE 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 one- or two-year 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.
Most private-equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement (LPA). Such funds have a general partner, which raises capital from cash-rich institutional investors, such as pension plans, universities, insurance companies, foundations, endowments, and high-net-worth individuals, which invest as limited partners (LPs) in the fund. Among the terms set forth in the limited partnership agreement are the following:
The following is an illustration of the difference between a private-equity fund and a private-equity firm:
A private-equity fund typically makes investments in companies (known as portfolio companies). These portfolio company investments are funded with the capital raised from LPs, and may be partially or substantially financed by debt. Some private equity investment transactions can be highly leveraged with debt financing—hence the acronym LBO for "leveraged buy-out". The cash flow from the portfolio company usually provides the source for the repayment of such debt. While billion dollar private equity investments make the headlines, private-equity funds also play a large role in middle market businesses.
Such LBO financing most often comes from commercial banks, although other financial institutions, such as hedge funds and mezzanine funds, may also provide financing. Since mid-2007, debt financing has become much more difficult to obtain for private-equity funds than in previous years.
LBO funds commonly acquire most of the equity interests or assets of the portfolio company through a newly created special purpose acquisition subsidiary controlled by the fund, and sometimes as a consortium of several like-minded funds.
The acquisition price of a portfolio company is usually based on a multiple of the company's historical income, most often based on the measure of earnings before interest, taxes, depreciation, and amortization. Private equity multiples are highly dependent on the portfolio company's industry, the size of the company, and the availability of LBO financing.
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Private equity fund AI simulator
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Private equity fund
A private equity fund (PE 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 one- or two-year 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.
Most private-equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement (LPA). Such funds have a general partner, which raises capital from cash-rich institutional investors, such as pension plans, universities, insurance companies, foundations, endowments, and high-net-worth individuals, which invest as limited partners (LPs) in the fund. Among the terms set forth in the limited partnership agreement are the following:
The following is an illustration of the difference between a private-equity fund and a private-equity firm:
A private-equity fund typically makes investments in companies (known as portfolio companies). These portfolio company investments are funded with the capital raised from LPs, and may be partially or substantially financed by debt. Some private equity investment transactions can be highly leveraged with debt financing—hence the acronym LBO for "leveraged buy-out". The cash flow from the portfolio company usually provides the source for the repayment of such debt. While billion dollar private equity investments make the headlines, private-equity funds also play a large role in middle market businesses.
Such LBO financing most often comes from commercial banks, although other financial institutions, such as hedge funds and mezzanine funds, may also provide financing. Since mid-2007, debt financing has become much more difficult to obtain for private-equity funds than in previous years.
LBO funds commonly acquire most of the equity interests or assets of the portfolio company through a newly created special purpose acquisition subsidiary controlled by the fund, and sometimes as a consortium of several like-minded funds.
The acquisition price of a portfolio company is usually based on a multiple of the company's historical income, most often based on the measure of earnings before interest, taxes, depreciation, and amortization. Private equity multiples are highly dependent on the portfolio company's industry, the size of the company, and the availability of LBO financing.