• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Private Equity Fund Structures

CFA® Exam, CFA® Exam Level 2, Investment Management

This lesson is part 7 of 9 in the course Alternative Assets

Typically, a private equity fund has a life of 10-12 years.

Return on investment in a private equity fund commonly exhibits a “J-curve” shape, where returns are low in negative early in the life of the fund with high returns coming late in the life of the fund as companies owned by the fund are exited.

Legal Forms

Two common legal forms for private equity funds are:

  • Limited Partnership: A general partner will manage the fund and will be legally exposed for liability of fund debts.  The fund’s investors are limited partners, whose liability is limited to the loss of capital provided.
  • Company Limited by Shares: Similar to limited partnership, but this structure may offer better legal protection to the partners, depending on the jurisdiction.
  • NOTE: Under either legal form, private equity funds are frequently closed-end, which places restrictions on exit of current investors and entry of new investors.

Economic Terms of a Private Equity Fund

  • Term: Ten years is a standard, but variations certainly exist
  • Vintage Year: Year that the fund was started; performance is often compared to funds with the same vintage year.
  • Target Fund Size
  • Management Fees: Commonly 1.5-2.5% of some measure of fund assets paid each year to the general partner
  • Transaction Fees: Fees for the general partner and potentially shared with the limited partners, for investment banking services.
  • Carried Interest: Percentage of profits paid to general partner; 20% is something of a standard.
  • Hurdle Rate: Threshold rate of return that the fund must generate before the carried interest is paid to the general partner.

Governance Terms of a Private Equity Fund

  • Key man clause: Provides a policy framework for issues around succession of critical executives involved in the fund’s companies.
  • Tag-along, drag-along rights: Offers protection to minority fund investors by allowing participation, in the event that an acquisition offer is made to the general partner.
  • Removal of general partner for cause: Limited partners can vote out the fund’s general partner; possibly requires a super-majority of 75%.
  • No-fault divorce: Allows for fund termination or general partner removal for cause.
  • Co-investment: Gives limited partners the first right to invest with the general partner.
  • Investment restrictions: Guidance for fund investments.
  • Clawback provision: Returns capital to the limited partners from the general partner that exceeds the profit split agreement.
  • Distribution waterfall: Limited partners receive payout prior to the general partner receiving carried interest.  This can be done on a per deal basis or based on total returns.
  • Disclosure and confidentiality
Previous Lesson

‹ Private Equity: Venture Capital, Leveraged Buyouts and Exit Strategies

Next Lesson

Venture Capital and Leveraged Buyout Valuation ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • CFA Level 2: Alternative Assets – Introduction
  • Real Estate: Types of Properties
  • Real Estate Valuation: NPV & IRR Analysis
  • Income Property Valuation Using Capitalization Rate
  • Gross Income Multiplier (GIM) for Real Estate Comps
  • Private Equity: Venture Capital, Leveraged Buyouts and Exit Strategies
  • Private Equity Fund Structures
  • Venture Capital and Leveraged Buyout Valuation
  • About Hedge Funds: What You Need to Know

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us