Private Equity Fund - Investment Features and Considerations

Investment Features and Considerations

Considerations for investing in private equity funds relative to other forms of investment include:

Substantial entry requirements

With most private equity funds requiring significant initial commitment (usually upwards of $1,000,000), which can be drawn at the manager's discretion over the first few years of the fund.

Limited liquidity

Investments in limited partnership interests (the dominant legal form of private equity investments) are referred to as "illiquid" investments, which should earn a premium over traditional securities, such as stocks and bonds. Once invested, liquidity of invested funds may be very difficult to achieve before the manager realizes the investments in the portfolio because an investor's capital may be locked-up in long-term investments for as long as twelve years. Distributions may be made only as investments are converted to cash with limited partners typically having no right to demand that sales be made.

Investment Control

Nearly all investors in private equity are passive and rely on the manager to make investments and generate liquidity from those investments. Typically, governance rights for limited partners in private equity funds are minimal.

Unfunded Commitments

An investor's commitment to a private equity fund is satisfied over time as the general partner makes capital calls on the investor. If a private equity firm cannot find suitable investment opportunities, it will not draw on an investor's commitment, and an investor may potentially invest less than expected or committed.

Investment Risks

Given the risks associated with private equity investments, an investor can lose all of its investment. The risk of loss of capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development or in companies with high amounts of financial leverage. By their nature, investments in privately held companies tend to be riskier than investments in publicly traded companies.

High returns

Consistent with the risks outlined above, private equity can provide high returns, with the best private equity managers significantly outperforming the public markets.

For the above mentioned reasons, private equity fund investment is for investors who can afford to have capital locked up for long periods and who can risk losing significant amounts of money. These disadvantages are offset by the potential benefits of annual returns, which may range up to 30% for successful funds.