Private Equity Funds Essay Example | Topics and Well Written Essays - 1500 words

Private Equity Funds - Essay Example These types of funds have huge difference from the other investment funds from the perspective of the business strategy used for seeking control over the businesses where they have invested (Cumming, 2009). These types of funds are also different in their structure because they are generally close-ended and have finite life time. The private equity funds have fixed number of shares. Private Equity Firms Nowadays, the leveraged buyout investment companies are referred to as the private equity organizations (Stowell, 2010; 2012). These types of firms are different from the venture capital firms which invest in emerging and young companies and as a result are not able to seek the majority control (Cumming and Johan, 2013). The emergence of private equity firms arose from the leveraged buyouts. The leveraged buyouts started during the 1980’s (Kaplan and Stromberg, 2009). The leveraged buyouts had increased rapidly in this decade and gradually the leveraged buyout companies became dominant corporate organizations. The private equity firms have been defined as the decentralized organizations with relatively fewer numbers of employees and investment professionals. Big private equity firms are larger in size but smaller than the firms where they make the investments. The funds raised by these private equity firms are known as the private equity funds. ... The limited partners are the institutional investors like, the public and corporate pension funds, insurance companies or other wealthy investors. Now the question arises whether the private equity companies are the limited partners or the general partners. These firms act as the general partners of the fund. It is compulsory that the general partners provide at least one percent of the total amount of capital. However, some general partners invest even higher. These private equity funds have definite or fixed lifetime that ranges from 10 to 13 years. The private equity firm has a time period of five years, for investing the total capital to be funded to the companies and then, an additional time period of another five to eight years, for returning the total capital amount to the investors. After providing the capital amount, the limited partners do not have much to say about how the general partners would be deploying the investment funds, till the basic contents of the actual fund agreement are followed by these general partners. The basic contents of the fund agreement include restraints on the amount of fund capital that can be invested in one particular company, types of securities where the fund can be invested and restraints on the debt amount. The general partner i.e. the private equity firm, are generally compensated in three different ways. Firstly, these general partners incur a management fee as a percentage of the total capital committed followed by a percentage of the total capital employed, after the investment amount is realized. Secondly, these firms also incur one portion of the profit out of the fund which is known as the ‘carried interest’. The carried interest equals to 20 percent