Private Equity (PE) is a Collective Investment Scheme where investors' monies, known as commitments,
are pooled together and drawn down/called as required by the Fund Manager to invest in companies
and to pay management fees & operating expenses incurred by the Fund".
Entities
a. General Partner – legally responsible for the fund, typically structured as a Limited Company.
b. Fund Manager – responsible for all decision making within the fund.
c. Founder Partner – optional partner in the Limited Partnership Structure.
d. Limited Partner – Investors in the fund. Institutional Investor, private individuals. Fund of funds
Cycle
1. Planning and Preparation
- General Partner and Fund Manager find suitable investments.
- Fund will typically a fixed term (10-12 years lifespan)
a. First 18 months – Set up and fund raising
b. Next 5 years – Purchasing investments
c. Last 3-4 years – Disposal/Sale of Investments
- Investment Strategy (geographical area also needs to be considered as this will have
reporting and regulatory implications), Management Team (The General Partner will decide
the size of team based on their previous experience, track record, ability to add value,
continuity and commitment.), Track Record (set a benchmark for investor expectations of
future returns), Fund Structure(to meet not only the needs of the Fund, but also of potential
investors, Significant tax planning goes on at this stage), Accounting Framework (UK, US
GAAP, IFRS), PPM (Marketing document, essentially a business plan, which is used to sell the
fund to prospective investors and therefore should cover all investor requirements)., Terms
and Conditions (draft the Limited Partnership Agreement)
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2. Launching the fund
- Fund Manager will promote and detail information about the Fund
a. Private Placement Memorandum (PPM) – to help advertise the Fund to new investors. It
is a document containing an overview of the fund and the key LPA clauses. It is used as a
marketing tool during fundraising to avoid incurring legal costs associated with the
preparation of an LPA.
b. Limited Partnership Agreement (LPA) which all LPs will sign and agree to on joining the
Fund; it is the legal agreement between the Fund and its investors.
The General Partner will detail their minimum target of commitments; on average it
takes 14 months of fundraising to reach this minimum target.
3. Closing the Fund
a. First or Initial Close – once the investors have agreed to join (opening of bank
accounts)
b. Subsequent Close – each time investors are admitted to the fund
c. No further investors can be admitted to the Fund after the Final Close.
GROWTH STAGE (The Investment Period)
4. Drawdowns/Capital Calls
- Investments are one reason that the Fund will require money, but you will also see
Drawdowns throughout the Fund's lifecycle in order to pay expenses of the Fund such as
Management Fees, administration, legal and audit fees. (US Companies don’t use
drawdowns (loan perception)
5. Make Investments
- Fund Manager will use the money raised to buy a range of investments over the life of the
fund by way of equity and / or debt over a short to medium time frame (1 - 8 years).
- They will ensure that the investments chosen are in line with the investment strategy and
Fund structure outlined within the Limited Partnership Agreement (LPA).
6. Manage Investments
- Fund Manager may have representation on the Board and if so will work closely with the
Management team of the Portfolio Company over a holding period, typically 3-5 years.
- The aim is to improve the company and ultimately raise its value so that it can be potentially
sold off to another investor or be floated on stock market at a profit.
- They will typically have investments staff working on the Fund to maximise its value
however the Fund Manager will be responsible for making decisions as to the investments
to be made.
MATURITY STAGE (period where the exit strategies for each investment will be decided, distributions of
any proceeds made to investors and the fund being wound-up)
7. Divestment
- Before the end of fund term, all of the investments purchased must be disposed of.
- The most common divestment, or exit strategies for a Fund Portfolio would be:
a. Trade Sales - the Fund is sold to another PE Fund or to Private Investors.
b. Initial Public Offering - sold publicly on the Stock Exchange.
c. Sale to General Partner - the Fund is sold to the General Partner.
d. Restructure - the Fund is restructured.
8. Distribution
- The return of capital from the Fund to investors. Funds may have periodic income from
investment dividends and interest, but these amounts are usually immaterial in comparison
to the realisation of the asset (when the investment is sold).
- These immaterial amounts may be netted off against the next drawdown. Once the Fund
has a significant amount to return to investors, we will see distributions.
9. Dissolution
- Fund's term, it will either be wound up (dissolved) or extended for up to another 2 years
depending on its performance.
- The dissolution process involves liquidating all assets of the Fund, and distributing any
proceeds of these liquidations in accordance with the LPA.
