Stages of a investment
Unlike public financial instruments, in which capital is invested all at once, private equity fund managers call capital as needed to make their investments, then distribute cash back to investors when appropriate.
| - Investment stage: In the early years, private equity funds typically do not produce returns, as initial investments are made and capital is drawn down. This is due to several factors, including management fees that are paid out from the initial committed capital, and the long-term nature of private equity investments, which can take many years to realise returns.
- Development stage: Over time, invested companies are expected to grow and increase in value, accruing returns for investors.
- Maturity/Liquidation stage: Ultimately, fund investments are liquidated to produce cash flows, and capital is returned to investors.
|
|
Returns on private equity investments are realised through one of five methods:
| - An initial public offering (IPO)
- A trade sale in which the private equity fund’s stake in a company is sold to another company or another private equity firm
- A merger with another company
- A joint venture with another company
- Liquidation of the company.
|
|
The early “dip” in portfolio value followed by a later “rise” as investments are realised is known as a “j-curve”, and is typical of private equity investments. Investment returns in the initial years are generally negative as management fees are drawn from committed capital and certain investments are “written down”, or reduced from the value of the portfolio.
Typical life-cycle of a private equity fund |
