Private equity funds have several moving parts. This quick guide will help you learn ‘who’ does ‘what.’
The term “private equity” can seem complicated to the outside world, but the basic structure of a PE investment is actually pretty simple. At their core, private equity funds are a collaboration between sponsors, general partners and limited partners.
Here’s everything you need to know—in 90 seconds or less.
PE firms operated under the guidance of a general partner (“GP”). The general partner aggregates and manages investment opportunities. The GP sources capital from limited partners (“LPs”).
Here’s a quick overview of the process:
PE firms can manage more than one fund at a time—each with different LPs—and it is commonplace for LPs to invest in multiple funds managed by the same PE firm.
So, who can act as a Limited Partner to a PE investment?
In times past, LPs consisted mostly of large institutions (like pension funds, labor unions, insurance companies and universities) and very wealthy families (the sorts of family names that appear each year on the Forbes 400).
[Editor’s Note: Continue learning with our webinar “What is a Private Fund?”]
In modern times, LPs come from a broad array of entities and people. There are hundreds of thousands of people who, while accredited investors, do not have the massive wealth that was standard in days gone by.
That means more opportunities to participate in a formerly exclusive class of investments. We believe this trend will accelerate.
(Want to know more? Click here.)
Sponsor (or financial sponsor) is another term for a private equity investment firm. A fund is said to be “sponsored” when it has a managing firm.
The sponsor makes the investments for the fund and performs the requisite diligence. Ultimately, the sponsor is charged with generating additional value through management expertise or navigating private capital markets.
For more information from the perspective of a potential limited partner (LP), check out:
Then sign up to receive our weekly Financial Poise newsletter, our take on the most relevant and topical business, financial and legal issues affecting investors and small business owners.
Always Plain English. Always Objective. Always FREE.
Michele has been a director with Financial Poise since 2012. View her LinkedIn profile here: https://www.linkedin.com/in/michele-schechter-46b9824a/
3 Real Estate Investment Types and Cash Flow Potential
Size Should Not Matter: Exchange Traded Funds Selections
The Farm Crisis of 2019: History Repeats with Ag Sector Debt
Accredited Investor Installment 9: Venture Capital Investing
Ready, Set, Action: Investing in Film Under a Smarter Lens
The Fine Print on Investing in Venture Capital
Please log in again. The login page will open in a new window. After logging in you can close it and return to this page.