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Private Equity

Private Equity is a field of finance where you invest equity interest in a privately held company in hopes of increasing value and selling it later at a premium. The Private Equity market historically has outperformed the more traditional asset classes

How Do Private Equity Firms Position Business for Growth?

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Private Equity Fund Structure

Private Equity Funds are closed-end investment vehicles which have a limited window to raise funds. They are generally formed as Limited Partnerships or Limited Liability companies. The Fund has an agreement or a mandate between the Investors and the Financial Sponsor. The mandates includes the parameters for acceptable investments in the partnership agreement related to scale, geography, and security type.

Private Equity Fund Structure

INVESTORS

Here is a breakdown of each of the components

Management Company

Fund Manager

The Management Company is the operating entity that employs the investment professionals responsible for allocating capital and managing investments. The management company is affiliated with the GP (General Partner) but are not the same entity. They evaluate opportunities, manage the portfolio and other day-to-day operations. A management company can work across multiple funds and have a different GP for each fund.

Investors

Limited Investment Partners

The investors provide the capital for the firm to make the investments. They are generally formed as limited partnerships. In raising funds, the fund founders reach out to sources of institutional investments such as pension plans, endowments, angel investors, and wealth funds. Commitment to the fund, known as the "capital commitment" is made with a partnership agreement, stipulating capital investment will be returned within a fixed period of time. Partnership agreements have fund mandates and the fund term imbedded in them. 

General Partners

Legal Authority

The General partner is the entity that has the legal authority to make decisions for the fund. They also therefore assume all legal liability. They analyze any potential deals and have the final decision on how the funds capital will be allocated. They may have unlimited liability for the debts of the business which means they must allocate capital carefully to increase the value of the fund and mitigate losses. 

Portfolio Companies

Invested Firms

Companies which the private equity firms hold capital in are considered portfolio companies. They are investments which are made with a goal of generating a return on investment when the company is sold or taken public. Some examples of portfolio companies include Growth Stage Companies (companies demonstrating potential for rapid growth), Mature companies (established companies experiencing declining profits and lack of growth), and distressed companies (companies facing financial difficulties such as bankruptcy or insolvency). 

How Do Private Equity Firms Make Money?

Glass Ceiling

1

Management Fees

 The management company typically earns an annual fee in the range of one to two percent based on the committed capital to the fund or the assets under management. 

2

Portfolio Co. Fees

The financial sponsor will charge fees directly to the portfolio companies. These types of fees go to the management company and includes fees for advisory, consulting, board, and transaction fees. 

3

Carried Interest

Carried interest is dependent on the economic relationship between the General Partner and the limited partners. The General partner typically earns 20% of the proceeds after the limited partner has received distributions equal tot he original invested capital plus a defined preferred return

Overview of M&A Process

Overview of the M&A Process
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