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