Private Capital Investing

CHAPTER 1Closed End Funds

A CLOSE UP ON PRIVATE EQUITY AND PRIVATE DEBT PARTNERSHIPS

A private equity fund is a collective investment scheme used for making minority or majority equity investments in private (i.e. non-listed) firms. A private debt fund is a collective investment scheme used for effecting loans or subscribing bonds in private firms.

At inception, investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. A private equity (debt) fund is raised and managed by investment professionals (who find, analyse, invest, monitor, and implement value creation actions in private firms) of a specific private equity (debt) firm. The goal of managers is to maximise investors' returns from invested capital.¹

Institutional private equity funds are usually structured as limited partnerships (although funds that are intended for retail use often have other legal forms, such as listed vehicles) with a fixed term of up to ten years (often with annual extensions of the agreed upon investment period and fund life). A partnership has a fixed contractual term: therefore, the investment is illiquid during that time, unless the investor decides to sell the partnership on the secondary market. The main participants to a private equity (debt) partnership (see also Figure 1.1) are:

1. General partner (GP): the manager is called the general partner and has potentially unlimited liability for the actions of the fund. To put a cap on this potentially ...