Legal Structure and Terms
Most private equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement or LPA. Such funds have a general partner (GP), which raises capital from cash-rich institutional investors, such as pension plans, universities, insurance companies, foundations, endowments, and high net worth individuals, which invest as limited partners (LPs) in the fund. Among the terms set forth in the limited partnership agreement are the following:
- Term of the partnership
- The partnership is usually a fixed-life investment vehicle that is typically 10 years plus some number of extensions.
- Management fees
- An annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations (typically 1 to 2% of the committed capital of the fund.
- Hurdle rate or preferred return
- A minimum rate of return (e.g., 8–12%), which must be achieved before the fund manager can receive any carried interest payments.
- Carried interest
- A share of the profits of the fund's investments (typically up to 20%), paid to the private equity fund's management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors.
- Transfer of an interest in the fund
- Private equity funds are not intended to be transferred or traded; however, they can be transferred to another investor. Typically, such a transfer must receive the consent of and is at the discretion of the fund's manager.
- Restrictions on the General Partner
- The fund's manager has significant discretion to make investments and control the affairs of the fund. However, the LPA does have certain restrictions and controls and is often limited in the type, size, or geographic focus of investments permitted, and how long the manager is permitted to make new investments.
Read more about this topic: Private Equity Fund
Famous quotes containing the words legal, structure and/or terms:
“We should stop looking to law to provide the final answer.... Law cannot save us from ourselves.... We have to go out and try to accomplish our goals and resolve disagreements by doing what we think is right. That energy and resourcefulness, not millions of legal cubicles, is what was great about America. Let judgment and personal conviction be important again.”
—Philip K. Howard, U.S. lawyer. The Death of Common Sense: How Law Is Suffocating America, pp. 186-87, Random House (1994)
“Agnosticism is a perfectly respectable and tenable philosophical position; it is not dogmatic and makes no pronouncements about the ultimate truths of the universe. It remains open to evidence and persuasion; lacking faith, it nevertheless does not deride faith. Atheism, on the other hand, is as unyielding and dogmatic about religious belief as true believers are about heathens. It tries to use reason to demolish a structure that is not built upon reason.”
—Sydney J. Harris (1917–1986)
“Books have their destinies like men. And their fates, as made by generations of readers, are very different from the destinies foreseen for them by their authors. Gulliver’s Travels, with a minimum of expurgation, has become a children’s book; a new illustrated edition is produced every Christmas. That’s what comes of saying profound things about humanity in terms of a fairy story.”
—Aldous Huxley (1894–1963)