Singhania and Company LLP, Advocates and Solicitors

Private Equity Funds

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Private equity fund is a pooled investment vehicle used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are normally limited partnerships with a fixed term of 10 years. At inception, institutional investors make an unfunded commitment to the limited partnership, which is drawn over the term of the fund. A private equity fund is managed and raised by investment professionals of a specific private equity firm. Normally, a single private equity firm will manage a series of distinct private equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested.

Private Equity Fund Structure

Private equity funds are normally structured as limited partnerships or limited liability corporations. There are several reasons, which are given below:
  • No double taxation.
  • No liability beyond the initial investment.

One of the main objectives in structuring a private equity fund is to ensure that the liability for taxes is not on the fund vehicle itself but on the investors in the fund. Normally private equity funds will be structured to have a 7-10 year life, with options to extend this for an additional 1-5 years. The main objective is to realize the full value of investments by the liquidation date. Private equity managers normally require commitments, which are drawn down as the funds to make investments or cover expenses.

Fees for private equity managers normally include a management fee of 1.5% 2.0% of assets under management, plus an incentive fee of 15%-20% of the profits retained after capital is returned to the limited partners. The incentive fee may include a hurdle rate of return, which must be met before the fee is earned, and also may include a claw-back provision in case later investments do poorly.
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