What Is The Fund Structure In Private Equity?
by Abdul Aziz Mondal Finance 05 April 2023
Private equity funds are not traded on open markets. Both the performance and management fees are included in their charges. Limited and general partners are terms used to describe private equity fund partners ‒ people who can participate in private equity operations and structuring.
General partners are entirely accountable to the market, whereas limited partners are only liable for the whole value of the funds they invest. Now, let’s dive deeper into private equity fund structuring.
Private Equity Fund: An Overview
Close-ended funds, including private equity funds, are a type of alternative investment. High-net-worth people and different organizations can invest directly in and obtain stock ownership in firms through these funds, whereas these assets are not available on the market.
Funds can consider investing in private or public companies ‒ in the latter case, they turn public companies into private ones by delisting them from exchanges. The private equity fund often sells its interests after a specified time has passed through various methods, such as initial public offerings or transfers to other private equity companies.
The structure of private equity funds traditionally follows a similar template that comprises categories of fund partners, management costs, investment horizons, and other crucial elements written in a limited partnership agreement. However, the minimum investments can be different for each fund.
Fund Partners And Their Responsibilities
Private equity funds can take part in distressed and mezzanine debts, private placement loans, leveraged buyouts, and other financial operations. They can also manage the fund’s portfolio. Despite the fact that there are several options for investors, such funds are usually created as limited partnerships.
You have to be familiar with two categories of fund participation if you want to comprehend the structure of private equity funds better. The partners of a private equity fund are first referred to as general partners. Each fund’s structure gives general partners or GPs, the authority to run private equity funds and choose which investments to put into their portfolios.
Obtaining money contributions from limited partners, or LPs, is another duty of general partners. Institutions, including insurance firms, pension funds, and university loan providers, are among this group of investors, along with high-net-worth individuals.
Limited partners, on the other hand, have no say in the choices made about investments. The precise investments that will be included in the fund are unclear to them when they purchase the fund’s assets. If limited partners are unhappy with the fund or the investment administrator, they can opt not to make any more investments in it.
What Is A Limited Partnership Agreement?
Institutional and private investors agree to particular investment details provided in a limited partnership agreement when a fund obtains its money. The risk to each category of participants in this agreement is what sets them apart. Limited partners can be held accountable only for their whole investment in the fund up to that amount.
Yet, general partners are entirely liable to the market, which means they are responsible for any debts or commitments the fund might have if it loses everything.
Investment Structure
The return on investment and the expenses undertaking operations with the fund are the essential elements of any fund’s limited partnership agreement. General partners furthermore earn a management fee on top of the decision privileges.
Typically, the limited partnership agreement specifies management costs for the fund’s general partners. Private equity funds frequently charge an annual fee of around 2% of the money invested to cover salaries, deal sourcing, legal assistance, research and data costs, and other fixed and variable expenses.
Also, private equity firms are given a carry ‒ this is a performance fee that typically amounts to 20% of the fund’s excess gross earnings.
Private equity fund has the capacity to assist in managing and resolving company management and governance concerns that might have an impact on a business. Therefore, investors are often ready to pay these fees.
Learn more about your fund structuring options ‒ experts from Thales Capital Luxembourg offer tailored solutions that match your objectives. Contact the company at +35220334030, email structuring@thales.lu, or visit 2 Place de Strasbourg L-2562 in Luxembourg for a consultation.
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