Private Equity Funds are collective investment vehicles, in which funds are raised and managed by the professionals of the private equity investment firm. They typically seek investments in the fund from institutional and high-net worth individuals, and invest in various types of equity instruments. They are usually structured as limited partnerships, and start with an unfunded commitment from the investors, and receive funding as and when they need to make investments.
The term of these funds is usually 10 years, which can be extended further after the completion of the term. These private equity funds can be specific in nature like buyout funds, seed capital funds, growth capital funds and special situations fund. Or they can also be of a generalist type which invests in any or all of the above. Private equity funds invest in companies of all sizes. They generally take these companies private, if they aren't already, and then take them through a multi-year restructuring program. The ultimate objective of these funds is to improve the existing business and to exit them at higher valuations. There are various exit strategies pursued by a fund, namely - Trade Sale, Initial Public Offer (IPO), Recapitalization, etc.
Private equity funds are managed by investment professionals, lead by a fund manager, and generally charge a management fee of 1-2% of the fund's corpus. These funds provide higher returns as compared to the traditional investment vehicles due to their ability to invest in private companies, through active participation in management operations, and through the use of leverage.
- Difficult to identify prospective enterprises with high growth potential at reasonable valuations
- Finding a profitable exit strategy which conforms with the Fund's expected return on investment and minimizes tax implications
- Having an experienced management team that would facilitate the turnaround
- Meeting strict regulatory and compliance requirements
- Providing a large in-house database of companies with strong base and a high growth potential developed by conducting thorough market research
- Connecting investors with the experts in the respective industries, so that the management team can be strengthened by their inclusion in the core team
- Assisting in negotiations with the entrepreneurs to arrive at the right business value
- Formulating detailed exit strategy based on multiple holding periods and 'best-case scenarios
- Professional advice coupled with extensive research helps complete the acquisition in a smooth manner
- Helps in facilitating a smooth exit from the investment by identifying exit routes which are in sync with the changing business conditions
- The management team is strengthened with industry experts so as to increase the chances of a successful turnaround
- Helps understand and comply with the latest rules and regulations across industries and countries
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