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Private Equity Fund Formation

Private funds are investment vehicles formed by sponsors, with a view to raise capital and make multiple investments in a specified industry sector or geographic region. Private funds are used by passive investors who make a commitment to invest an amount of capital over time, entrusting the fund’s sponsor to source, acquire, manage and divest the fund’s investments.

The structure of a private equity fund generally involves the following:

  • The investment fund, which is a pure pool of capital with no direct operations.
  • A general partner (GP) or other managing entity (manager), which has the legal power to act on behalf of the investment fund.
  • A management company or investment adviser, which is often affiliated with the GP or manager and is appointed to provide investment advisory services to the fund. This is the operating entity that employs the investment professionals, evaluates potential investment opportunities and incurs the expenses associated with day-to-day operations and administration of the fund.
  • Other related fund entities, which may be formed to account for certain regulatory, tax and other structuring needs of one or more groups of investors.

The economic terms of private equity funds differ widely depending on a number of factors, including:

  • The expertise and track record of the sponsor.
  • The investment purpose and structure of the fund.
  • The overall fee structure of the fund taking into account factors.
  • General market dynamics.

 

Despite the specific economics vary from fund to fund, there are certain basic elements of fund economics that are common to all private equity funds, as the following:

  • Investor capital commitments.
  • Allocations and distributions of profits and losses of the fund.
  • Fees paid to the fund’s investment adviser.
  • Expenses of the fund.

FUND RAISING AND FUND CLOSING

There are several factors on which it depends the success of any fundraising and the time required for the fund to be raised, among which:

  • General economic outlook.
  • Economic outlook of the target sectors of the fund and of the geographic region in which the fund will invest.
  • Track record of the sponsor.
  • Strength of its (or its placement agent’s) relationships with prospective investors.