Financial Education

Private equity funds are typically structured as limited partnerships or limited liability corporations (LLCs). There are a number of reasons for this preference.

• No double taxation (profits taxed at limited partner or shareholder level)
• No liability beyond the initial investment

Typically 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 objective is to realize the full value of investments by the liquidation date. Rather than manage pools of uninvested capital, private equity managers typically require commitments that are drawn down as the funds are needed to make investments or cover expenses.

Fees for private equity managers typically 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 that must be met before the fee is earned, and also may include a claw-back provision in case later investments do poorly.

For more information, see all articles on: Active Management, Alternative Assets, Institutional Investing, Investing in Private Equity, Portfolio Management, Securities Regulation

See also:

Buyout Funds

The Role of Private Equity Investments in a Portfolio

Investing in Distressed Securities

Investments in Private Equity

The Structure of Hedge Funds