Private equity funds
Fund is a vehicle in which investments are put in collectively
Legislation on Funds and individual investment advice are very relevant. These are two
broad catgeories.
UCITS V – First legislation. For listed securities. Products have to pass certain criteria
and then stamped as UCITS to be made available for retail clients
Then first financial crisis
2003- AIFMD introduced to regulate all funds that are not UCITS funds.
Private equity is AIFMD – if you invest in real estate, non-listed companies, debt, etc. it
will all fall under AIFMD
Fund: is a vehicle in which money comes together.
Investors pool in their equity. This is managed by a manager (a management company).
They exercise strategy to deploy this pool into non-listed companies.
Why a fund??
- Diversed portfolio of assets typically
- Access to funds you would not be able to source
- Capacity increases
VC is investing in early stage company
Buy out is investing in mature company
In between this there is also some form of expansion or growth capital
VC is usually higher risk and higher return than the buy out or growth stage. Cos it either
grows or fails – and this stage is when it becomes cash rich if success
Buy out is usually when some is kept to management and the rest is bought out by a
new investor
Notion of a fund may vary – it is a wide set. It also diUers with the kind of fund.
Structurally from a legal and commercial perspective – funds can either be open ended
or closed end.
Closed ended – finite term. It is like a shoebox, used for a fixed term to deliver some
purpose and then thrown away. But it is not a very liquid fund.
Open ended funds behave diUerently (includes UCIT) – investor can join the fund, it
becomes bigger and when they leave it becomes smaller (like a sponge). They are
evergreen and promise eternal life. One can redeem it as cash on a certain periodic
basis – so more liquid. UCITs are usually if they can get money back at any point in time
– for investment protection purposes.
Also valuation is very important in an open ended fund but in a closed ended fund, you’ll
realise the value only when the shoe box is closed up.
Typical non-listed PE fund:
- Long term (typically 10 to 12 years)
- Illiquid iinvestment (closed ended structure and nature of the asset class)
- Discretionary management – lot of power by management.
- Usually these funds are open to institutional investors or professional investors
and not retail investors Commented [SS1]: What qualifies you as an institutional
- Manager receives management fee and a performance related fee called investor
promote fee or carried fee
Manager helps to balance and enhance governance during the lift of the illiquid
asset
Fund terms are limited by commercial, tax and legal and marketability
considerations
Tax:
They are either taxable (opaque) or tax-neutral (transparent). So an oval (or triangle
in US) is transparent and rectangle is non-transparent.
- Pension fund are mostly tax-free.
Fund structuring:
- Location of management is important – esp from tax perspective
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