Chapter 9 - Private Equity Funds

Question 1

What is a private equity fund

Answer 1

Aimed at HNW, sophisticated investors and institutional investors

Usual very high value of assets - identify specific business opportunities which they can invest into

Business opportunities include
Buyouts
Acquisition of privately owned companies
Restructuring
Companies who are in distress
Companies with promising growth prospects

Tend to invest in established businesses - venture capital focuses on start ups needing guidance/ investment

Question 2

Private equity investment schemes

Answer 2

Usually large commitments required - due to underlying nature of assets

Active for a set period of time - aim to achieve a pre determined Internal Rate of Return (IRR)

IRR expressed as a percentage is indicate of whether the investment is viable

One fund reaches end of its life - manager will begin capital raising for another fund

Question 3

Life cycle of a private equity fund

Answer 3

Capital raising
1-3 years - period during the which manager markets the fund and raises capital for investment from investors

Sourcing of investment opportunities
2-5 years - period during which the fund manager secures the staff required for management of the fund and secures investment opportunities

Managing the portfolio
3-7 years - period during which manager actively manages the investments with a view to achieve the IRR agreed at the outset

Exiting
The period during which manager seeks to dispose of assets through a sale or an IPO in order to return capital + return to investors. Usually coincides with capital raising for a new fund

Overall life of PE fund can last between 10-15 years

Question 4

Typical PE fund structure

Answer 4

Common entity used for PE funds is limited partnership - flexibility for contributions due to large amounts normally committed

GP is usually connected to the private equity firm - as GPS have unlimited liability usually established as limited liability entity

GP receives a management fee - usually around 2% of the fund asset value

GP is also entitled to carried interest - equivalent of performance fee - only payable after IRR is met. Complex calculation but usually approx 20% of the fund’s annual profits

LP make capital commitments - their entitlement is stated in the LPA as are all other terms such as:
Provisions for carried interests and management fees
Agreed IRR
Duration of the fund
Extension options etc

Generally PE firms incorporated offshore

Question 5

Why offshore for PE Funds

Answer 5

Regulation
Offshore regulators are keen to encourage growth of PE structures offshore and have been responsive to the needs of PE funds

Legislation
Offshore legislation has evolved to provide more flexibility and competitive benefits to funds in order to attract more business

Taxation
Not main consideration - LPs tend to be transparent - however the existence of double tax treaties can be beneficial - prevent tax being paid twice

Language
Most offshore centres use English is their main language

Time zone
Jurisdiction chosen will often be based near the market that the fun is seeking to do business - convenience

Professional skills available
Most offshore jurisdictions have a wealth of qualified and experienced professionals ranging from advisors to administrators that are able to provide the necessary expertise required to run a PE fund

Question 6

Administrators role in PE fund administration

Answer 6

Key administration duties linked to PE funds
Administration of commitment investment - investors submit on a commitment basis, fund admins keep track of commitments paid

Calculate monies to be paid to investors and arrangement payments - manager determines amounts and when these should be paid up, based on underlying returns

Calculate net amount for payment if a commitment call and a profit payment coincide

Adhered to set deadlines - Nature of PE activity is revolving around tight deadlines as opportunities need to be secured