Features of funds

A number of characteristics distinguish private equity funds from other types of investments, both traditional and alternative.

Structure: Private equity funds and funds of funds are generally organised as limited partnerships in which the investors are limited partners and the fund sponsors are general partners.
Investment term: The investment term for private equity funds is typically ten years, and may be subject to extensions as the general partner liquidates all the portfolio holdings. Invested assets are therefore highly illiquid.
Capital commitment: As investment opportunities are identified, the fund issues capital calls to investors, requesting a portion of their commitment. Each investor’s commitment is slowly drawn down. As investments are realised, the fund returns capital back to the investors.
Fees: Management fees can be rather high in private equity funds, because fees are usually charged on the entire committed capital, rather than the amount of capital invested at any given time.
Carried interest: Management fees often are accompanied by a “carried interest” fee, by which a portion of profits are retained by the general partner.

Private equity is usually accessed through one of two methods:

Single manager funds

A single manager private equity fund is a portfolio of investments managed by one private equity manager. The fund may focus on a specific style such as venture capital or buyout strategies, and often may specialise in one or several market sectors.

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Funds of funds

A fund of funds is a portfolio in which the underlying investments are funds, rather than individual securities. A private equity fund of funds, then, invests in a variety of private equity funds. Capital is distributed across a variety of fund managers that directly invest according to their strategy in the underlying investments.

A fund of funds may employ a variety of investment strategies or take a more focused approach. Either way, a fund of funds may offer investors reduced volatility and risk relative to a single manager structure. In addition, the economies of scale achieved through a fund of funds structure may offer investors access to funds that would otherwise be closed to them.

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Typical structure of a private equity fund of funds

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