Private Equity: Up Close and Personal

What’s in this section:

 

How are Private Equity funds structured?

What is a General Partner?

The General Partner is the manager of the private equity fund. The General Partner is usually another company and could be the PE firm itself or the senior partners of a PE firm.

 

What is a Limited partner?

The Limited Partners are the investors in a private equity asset held by the limited partnership. Limited Partners are not involved in the day-to-day activities of the business.

Limited Partners have historically been institutional investors (i.e., pension funds and endowments) and the ultra-wealthy. These investors are looking for better returns than those gained in the public market.

Like the name implies, Limited Partners have limited liability, while General Partners have unlimited liability.

 

How does PE work? How do they make such big returns?

PE firms are pretty savvy, using some smart and sophisticated methods to achieve their double-digit returns. Here are some common strategies:

 

Common Investment Strategies:

Growth funds - typically have the widest mandate and focus on non-control equity investments but may also participate in buyout or mezzanine transactions.

Leveraged Buyout - purchasing an entire company outright, but gets additional buying power by borrowing funds from a bank. They are investing for complete control of the company and a subsequent sale.

Distressed funds - essentially a subset of buyout funds, using debt instruments or other mechanisms to acquire control.

Mezzanine and merchant banking funds - invest in debt instruments that typically pay a high rate of return and may also have an equity participation.

 

What is an "Exit?"

The most common forms of exit are:

Sale to a strategic investor - This form of exit generally has the advantage of being less expensive and time-consuming than an IPO, although the financial rewards are generally lower than for a successful IPO. Sales have the potential disadvantage of being required to meet competition law requirements and can involve potentially lengthy ongoing liability for indemnities.

Sale to a private equity investor - This form of exit has much of the same advantages and disadvantages as a sale to a strategic investor, with the added advantages of generally requiring much less stringent representations as to the underlying business and being more likely to avoid scrutiny under competition laws.

Recapitalization - borrowing to repurchase equity or pay dividends, which may be used as a way of achieving a full or partial exit.

IPO - A successful IPO generally results in a greater return on the PE fund investment. However, an IPO is expensive, time-consuming and may not result in the total sale of the fund investment.