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90 Second Lesson – Private Equity Sponsor v. Private Equity Fund

90 Second Lesson – Private Equity Sponsor v. Private Equity Fund

A private equity fund is managed by a private equity firm, often called a private equity sponsor or financial sponsor. The fund is the investment or capital used to buy a controlling interest in a private company, while the sponsor is responsible for operating the fund.

Who are Financial Sponsors? The Role of the General Partner

The firm or financial sponsor is typically the general partner (GP) of the fund. The GP manages the investment and may invest a small percentage (1-3%) into the fund.  The investors in a private equity fund (i.e., those that put up 99% of the capital) are typically limited partners (LPs). While these investors/limited partners may be institutions, such as pension funds and banks, they can also include high-net-worth individuals who meet the definition of “accredited investor”.

A private equity sponsor may manage two or more private equity funds at the same time, and the investors of each fund may or may not overlap.

Who are today’s top private equity firms? Preqin ranks the following firms based on capital raised in the last 10 years.

    1. Carlyle Group
    2. Blackstone Group
    3. KKR
    4. Goldman Sachs
    5. Ardian
    6. TPG
    7. CVC Capital Partners
    8. Warburg Pincus
    9. Advent International
    10. Bain Capital

Understanding Types of Private Equity Funds

Private equity funds are investments in privately held companies, and these funds can target specific industries or geographical areas. PE funds use both equity and debt, meaning they combine raised capital from LPs with borrowed money from banks.

There are different types of PE funds, including:

  • Leveraged Buyout Funds (LBOs): These funds invest in later-stage or mature companies. The fund buys a controlling interest in the company, such as control in operations or management, with the long-term goal of selling the company to another firm or making it public.
  • Venture Capital Funds: While technically under the PE sphere, venture capital funds are typically handled by a VC firm. These funds are invested in start-up or early-stage companies with little control or stake in the company. They only use equity, rather than a combination of equity and debt.
  • Growth Equity Funds: These are investments in mature companies looking to enter new or emerging markets or expand in some way.
  • Real Estate Funds: Like their name suggests, these funds invest in real estate and REITs (Real Estate Investment Trusts) and require higher amounts of capital to invest.
  • Funds of Funds: Funds of funds allow investors who cannot commit the minimum amount of capital to a mutual or hedge fund the ability to invest in diversified assets managed by other fund managers.

A private equity sponsor will manage a private equity fund for less than 10 years, ultimately exiting the company and selling it at, hopefully, a higher value.

[Editor’s Note: For more information on this and related topics, you may wish to attend the following webinar: Options for the Accredited Investor.]

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