What is a Private Equity Fund?
A private equity fund involves investing in a fund that’s managed by a private equity firm. The adviser will receive money from multiple investors and combine it so that the capital can be invested elsewhere. A common strategy is for a private equity fund to focus on operating companies and help them boost their value.
As a type of fund that’s not SEC-registered, a private equity fund doesn’t have to meet public disclosure rules, which is what makes it appealing to some investors.
Read the rest of this article to learn more about private equity funds and how they work.
What are the Types of Private Equity Funds?
There are two categories of private equity funds. These are:
Venture Capital (VC)
Venture capital funds are typically invested in startups with growth potential but with restricted access to capital. This can help them to raise capital they need.
Investors find VCs interesting because they can generate high returns even though they do have some risks involved.
Buyout or Leveraged Buyout
These funds focus on older companies with known profits, with leveraged buyout funds using borrowed money to increase their returns. It’s common for buyouts to be larger than VC funds.
How are Private Equity Funds Structured?
A private equity fund will be set up as a limited partnership, with two main parties involved:
- Limited partner (LP). People investing the most capital are the LPs. They have limited liability, so they can only lose what they’ve invested in the fund.
- General partner (GP). This is the entity who manages the fund with unlimited liability, while ensuring the fund operates as it’s supposed to and also investing in the fund.
Who Can Invest in a Private Equity Fund?
It’s common for both accredited investors and qualified clients to invest in private equity funds. Examples of both include insurance companies and pension funds. High-income and high-net-worth individuals are also considered, since the investments are usually significant.
What are Common Traits of Private Equity Funds?
There are some important things to know about private equity funds. Here are some terms you’ll likely encounter with them.
- Illiquidity. Since this is a long-term investment, it can be held for months or years before investors see returns. There are also restrictions on when investors are allowed to withdraw their investments.
- Costs and fees. Offering documents presented to investors should include detailed information about any fees and expenses investors will have to encounter. It’s important to check all mention of fees to be well informed before investing.
- Conflicts of interest. If there are any company interests that are in conflict with the funds being managed, this needs to be disclosed early on.
- Exit considerations. It’s essential to know when exit will occur and how this can be conducted.
- High risk, high reward. Private equity firms have access to a wide range of companies but they need to manage their risk by exercising due diligence.
How Do You Raise Private Equity Funds?
There are specific steps involved when raising private equity funds. These include the following:
- Marketing before the fund launch. This serves to gauge investor interest and should occur several months before the launch.
- Roadshow. The private equity firm’s team will conduct presentations as a way to promote their fund. This is a more established marketing effort.
- Investor commitment. At this crucial stage, investors will sign agreements stating that they will commit capital to the private equity fund.
- Closing the fund. There will be a closing period when a certain percentage of total capital is met, followed by further closings so that extra investors have a chance to join the fund.
What Legal Documents Do You Need When Investing in a Private Equity Fund?
Documents you’ll encounter with private equity funds include a Limited Partnership Agreement (LPA) and Investment Management Agreement (IMA).
Limited Partnership Agreement (LPA)
The fund’s LPA will outline all rights and duties of the partners. This includes processes related to how to distribute profits and funding steps to follow. It also specifies how many of the profits the GP receives.
Investment Management Agreement (IMA)
The private equity fund is in an agreement with the management company, so this agreement details important aspects of funding, such as compensation fees and activity scope. This is a legal document that’s central to the relationship between the two parties.
Subscription Agreement
This contract includes information about how investors will commit capital to the fund and has representations about their qualifications. Other information included in this agreement involves funding duties and fund term compliance.
Get a Legal Review of Your Private Equity Fund Documents
It’s recommended to get a legal review of your private equity fund documents. A professional lawyer will thoroughly review your documents to ensure they’re legally binding, clear, and easy to understand to prevent disputes.
You can find a lawyer on ContractsCounsel, an online legal marketplace where clients connect with vetted lawyers. To request a review, here are the steps to follow:
1. Post your project on the ContractsCounsel marketplace.
2. You’ll receive multiple lawyer bids.
3. Review the lawyers’ profiles according to factors such as their client ratings, years of experience, and fields of expertise.
4. Select a lawyer to work with.
Do You Need a Lawyer for Private Equity Funds?
You should hire a lawyer for private equity funds because these can be complex. Here is how they can help you.
- They’ll ensure the private equity fund is well structured. They’ll help you choose the best legal structure depending on your expectations and financial goals.
- They’ll draft documents you need, such as the PPM and LPA, so that they’re legal yet free of legal jargon that can cause issues.
- They’ll help you stay legally compliant. By preventing mistakes, this will prevent you from having to pay fines or face other consequences.
- They’ll negotiate agreement terms to reduce your risks.
- They’ll ensure proper disclosure and liability protection.
- They’ll help you navigate cross-border transactions, considering funds can take place across jurisdictions.
Where can you find a lawyer for private equity funds?
You can hire a lawyer who’s ready to assist you on ContractsCounsel. You’ll get to work with a professional lawyer who has years of experience in helping people select the right private equity fund and navigate all its complexities. This will give you peace of mind that you’re protecting your interests while reducing your risks.
