What is a Private Equity Fund?

Published by Thomas Herold in Corporate Finance, Investments, Trading

'Private Equity Fund' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Private Equity Fund refers to a fund that is not carried by a public stock exchange and which does not have to be regulated by the SEC Securities Exchange Commission. Private equity itself is made up of the range of investors and funds who choose to invest directly in privately held companies. They might also pursue mergers and acquisitions to cause public companies to be delisted by taking private the companies which were public.

The capital for such private equity comes from retail and institutional investors. Such funding is useful for many types of purposes. It might bolster working capital, make possible research into a new technology, provide for acquisitions of public or other privately held companies, or simply improve a given company’s balance sheet.

Such private equity funds derived most of their resources from accredited investors and institutional investors. These deep pocketed entities are able to allocate enormous amounts of money into an investment (that might possibly fail) for longer term time frames. Generally these longer investment holding time frames become necessary for such private equity investments. This is because working with distressed companies or waiting on liquidity events like IPO initial public offerings or selling the private company to a public one needs time.

This private equity fund market has grown rapidly from the 1970s to date. Nowadays, funding pools can be started by private equity firms so that they can take enormous public companies private. A substantial quantity of these private equity operations engage in what analysts call LBO leveraged buyouts. With an LBO, large purchases can be affected in the markets thanks to the pooling of enormous resources. Once the transaction is completed, the private equity firms will do their very best to better the profits, prospects, and all around financial condition of the newly privatized company. Their greatest hope and plan is to resell the company back via an initial public offering or alternatively through selling the company to another larger firm.

It is worth noting that the fee arrangements of these private equity funds are different from one fund to the next. They generally start with a management fee and add a performance-based fee to the costs as well. Some firms will assess an approximately two percent management fee each year based on the value of the assets under management. They usually also get 20 percent of all profits realized when selling any companies.

When investors hand over their money to one of these private equity funds, they are throwing their lot in with an adviser that is actually a private equity firm. These funds are something like a hedge fund or mutual fund in many respects. All three of them are comprised of pooled resources that an advisor combines to utilize for investment purchases for the common good of the fund. There are differences between these types of pooled funds though.

Private equity firms will usually concentrate their efforts on longer term time framed investment possibilities. They will often look for those assets that require significant amounts of time in order to sell investments. This given investment horizon will require many times at least 10 years and sometimes significantly longer than this.

A common strategy of investing with these private equity funds proves to be engaging in minority stake investments in startups or companies which are rapidly expanding in a promising industry. Others focus solely on the previously mentioned leveraged buyouts. In either case, transparency of these funds is an issue that has been growing since 2015. The high incomes for these funds have raised questions about what they are doing with the enormous sums of money they receive.

From 2016, some states began to pursue regulations and bills that provided more clarity on what the inner workings of such private equity firms is really like. The congress has so far resisted these investigations and tried to limit the ability of the SEC Securities and Exchange Commission to access the funds’ privately held proprietary information.

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The term 'Private Equity Fund' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.