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:
Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…
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