The lifecycle stages can vary from fund to fund, but most will follow this general pattern:
The organization and formation of the fund. during which the fund builds its management team and raises money. This often takes about two years. A multi-year period of sourcing and investing. This is the time when the firm pulls in high-value investors and makes acquisitions.
The portfolio management period. During this period, the fund must prove its bona fides by increasing the value of its acquisitions and investments. This is critical to the ultimate exit and sale of the assets or positions, since any buyer will look at the entire history of the fund’s performance to determine its value.
Exiting of the fund, which may occur through IPOs, secondary markets or trade sales. The length of this stage varies widely. If an acquisition builds value quickly, the exit can happen in a year or less. Six or seven years commitment is not unusual, however. Most private equity funds specify a fund exit date, but factors such as a market downturn may require changes.
Private Equity Fund Fees
Many funds charge annual management fees, which often range between 1% and 2% of the capital under management. This fee covers firm salaries, legal and sourcing services, research and analysis, marketing and additional operations costs. Private equity funds also come with a carry or performance fee. Typically it amounts to about 20% of the fund’s profit. This may seem steep, but if a private equity firm has a reputation for turning high profits, many qualified, discriminating investors are happy to pay, as returns more than justify the expense.
0 Comments