Insight on Private Equity (PE)

How Private Equity works?

  • Funds are raised from institutions and wealthy individuals.
  • After specified amount is raised, fund is closed to new investors.
  • Money is invested in buying businesses.
  • All businesses are sold and fund liquidated in a predefined time frame, typically less than 10 years.
  • PE firms are typically structured as private partnerships.

Role of Investors:

  • Fund management contract may impose limits on the size of any single business investment.
  • Once money is committed, investors have no control over management.
  • Investor advisory council has few powers, compared to the board of a public company.

Where PE makes sense:

  • Companies with High Debt
  • There is stable cash flow
  • There are limited capital investment requirements
  • There is at least moderate future growth
  • There is opportunity to enhance performance in the short term medium

Fees & Incentives:

  • A fee of about 1.5-2.0 % of assets under management
  • 20% of fund profits subject to a minimum rate of return for investors
  • Fund profits mostly realized through capital gains

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