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:
“... whilst you are proclaiming peace and good will to men, Emancipating all Nations, you insist upon retaining absolute power over wives. But you must remember that Arbitrary power is like most other things which are very hard, very liable to be broken—and notwithstanding all your wise Laws and Maxims we have it in our power not only to free ourselves but to subdue our Masters, and without violence throw both your natural and legal authority at our feet ...”
—Abigail Adams (1744–1818)
“What is the structure of government that will best guard against the precipitate counsels and factious combinations for unjust purposes, without a sacrifice of the fundamental principle of republicanism?”
—James Madison (1751–1836)
“Light is meaningful only in relation to darkness, and truth presupposes error. It is these mingled opposites which people our life, which make it pungent, intoxicating. We only exist in terms of this conflict, in the zone where black and white clash.”
—Louis Aragon (1897–1982)