Private equity funds are very important for different types of businesses. A private equity fund consists of an investment scheme that is used to make investments in various companies in line with regular private equity strategies. Most private equity funds are created in the form of limited partnerships. These partnerships last for five or ten years. A limited partnership has the same privileges as a general partnership (making decisions, being on the board, voting rights, and getting percentage of profits), except that there is an expiry on the deal. They are designed to keep money coming into firms without creating the problem of too many partners.
The purpose of private equity funds is to expand or solidify a firm’s business plan. A firm that is looking to expand into different areas and hire new employees is the perfect candidate for such a fund. New investors are found, deals are struck, and their money is then managed by seasoned equity managers. For example, a law firm that deals in criminal cases may be looking to expand into business law. They would require a private equity fund to make that happen, instead of investing their existing profits into such a venture.
There are a few factors involved in dealing with a private equity fund. The private equity fund management team is usually paid 1 or 2 percent of the committed capital in fees. But, there are also goals that have to be met. The fund’s manager must ensure that a minimum return rate is being met after a certain time period. For example, a firm might decide that 10% returns need to be seen after two years. Once this is achieved, the fund’s management team will also begin to see their share of profits.
The fund’s manager is in charge of making investment decisions. However, there are LPA laws that designate what types of investments can be made. This policy is in place to ensure that overly risky investments are not made. It is up to the manager to find the proper balance between investments that will generate a high return, versus investments that are too safe and will yield little profits.
There are always risks associated with managing such a fund. Not all investments pan out and the intended venture for the firm could fail completely. On the flip side, if everything is a success then there are generally high returns for all the partners and investors to share in.
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