How are Private Equity Funds Structured?

Private equity gained prominence from the 1980s, when technology in the United States got their much-needed boost from venture capitals. This allowed many fledging and struggling companies to raise capital from private sources rather than approaching the public markets.

These private equity funds promised great return potential to the investors, however, there were certain drawbacks as they were not readily available to the average investor. Companies usually require a minimum investment of $200,000 which targets the institutional investors who have such kind of capital at their disposal.

Even if you have cleared the first hurdle of having the minimum requirement, it is recommended for you to understand these funds’ typical structures.

Basics of Private Equity Fund

Private equity funds are an alternate investment class as they are private and not listed on any public exchange markets. High net-worth individuals and financial institutions invest directly into these companies with these funds to acquire equity ownership in the company. Minimum private equity investment amount required might differ according to the requirements of the fund. The structure of private equity funds follow a much similar framework that includes classes of fund partners, management fees, investment horizons, and other key factors laid out in a limited partnership agreement (LPA).

Fee Structure of Private Equity Fund

Private equity charges both, a management fee as well as a performance fee that an investor needs to keep in mind whilst planning their private market investment.

The management fee is about 2% of the capital the investors commit to invest in the fund. This management fee covers the fund’s operational and administrative fees such as salaries, deal fees, etc. Investors should note that the management fee is charged even if the fund does not generate a positive return.

The performance fee is a percentage of profits generated by the fund which is passed on to the general partner. These fees can go as high as 20% and are subject to exist on the fund providing a positive return.

Investment and Payout Structure

Along with the fees that an investor pays on their fund, i.e 2% management fee and upto 20% of performance fees, they would have to pay the amount of the fund as well. These fees cover all the expenses including firm salaries, deal sourcing and legal services, data and research costs, marketing, and additional fixed and variable costs. Investors are willing to pay these fees due to the fund’s ability to manage and mitigate corporate government and management issues along with the risk that might negatively affect the private market shares of the invested company.

Other Considerations of Private Fund

There are certain restrictions in the type of investments that an investor could make while considering to invest in a private equity fund. These restrictions might include industry type, company size, diversification requirements, and the location of potential acquisition targets. GPs are only allowed to allocate a specific amount of money from the fund into each deal of equity shares they finance.

Private equity funds offer unique investment opportunities to high networth individuals and institutional investors providing them with great return potential. However, private equity fund investors should know the structure to be aware of the amount of time they will be required to invest, all associated management and performance fees, and the liabilities associated.

ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors. 

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