Although private equity funds can seem complicated, the basic structure is actually quite simple. This quick guide will explain everything you need to know about the wonderful world of private equity funds—including the roles of the sponsor, general partner and limited partner—in 90 seconds or less.
Private equity is an alternative investment. Similar to venture capital or hedge funds, it consists of capital not listed on a public exchange. Instead, it is composed of private equity funds and investors that invest directly in private companies.
Like a mutual or hedge fund, a private equity fund is a pooled investment vehicle. The fund is managed by a private equity firm. Investing in private equity funds appeals to investors, because these funds can yield better returns than those achieved in public equity markets.
At their core, private equity funds are a collaboration between three main players:
Private equity funds have several moving parts. Here’s a quick overview of the investment process in five easy steps:
LPs used to consist mostly of large institutions, such as pension funds, labor unions, insurance companies and universities. Very wealthy families—the kind of family names that appear each year on the Forbes 400 —were also typical LPs.
Now, LPs come from a broad array of entities and people. There are thousands of high-net-worth-individuals who qualify as accredited investors who can now invest in a private equity fund. And while many traditional private equity opportunities are open only to accredited investors, a growing number of opportunities exist for non-accredited investors as well. Average investors can now invest in some private equity investments with smaller asset amounts. That means there are more opportunities for the everyday person to participate in a formerly exclusive class of investments.
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