You may have heard of the term ‘Private Equity Fund’ (PEF) before. However, you probably weren’t sure what it actually means or what a Private Equity Fund does; or perhaps you were involved in such a fund or in a transaction with such a fund? The blog will briefly set out the characteristics of a Private Equity Fund.
What is a Private Equity Fund?
A ‘Private Equity Fund’ is a collective investment fund. Initially a PEF will seek to raise money from a number of different investors (i.e. the fund’s investors); it will then seek investment opportunities to make a return (capital growth and income) for its investors. Such investments made by the private equity fund are often referred to as portfolio companies.
The fund’s investors are usually high net worth individuals and institutions such as insurance companies, pension funds, foundations, universities etc.
How does it Work?
A Private Equity Fund would normally be set up as a Limited Partnership (LP). A Limited Partnership will normally include one general partner, and any number of limited partners. This is not the only way such funds can be set up, but it is the most common. The difference between the ‘general partner’ and the ‘other’ is the general partner’s liability for the LP’s debts is unlimited; whereas the limited partners’ liability is limited to the amount of capital they have invested in the LP.
The general partner will usually be the fund manager, responsible for the day to day management of the fund. It’s important that the limited liability partners (usually the investors) are not involved in the day-to-day management of the fund. If limited liability partners are involved in the day-to-day management of the fund they might lose their limited liability protection.
It is also important to note that Limited Partnerships are ‘transparent’ for tax purposes. This means that the LP itself does not pay tax on any income and/or capital gains made. However, the investors will still be taxed on their share of the income or gains. For further advice in relation to any tax liabilities we recommend you seek advice from an independent accountant.
Portfolio clients
The fund’s investments include, but are not limited to:
- Venture capital: the funding of a new business with little or no track record such as start-ups;
- Development Capital: the funding of an existing, more mature business to help it develop; and/or
- Buy-out: the funding of purchases of established business where there is still a margin for improvement of performance.
The fund’s purpose is to seek opportunities and make investments to ultimately generate a return for its investors. This can be achieved through different methods, subject to the type of investment being made.