Private equity funds, for example, can help businesses increase the profitability of their investments in a variety of ways. While private equity is only available to a select group of investors, information about fund structures, fees, and partnership agreements is freely available. Swell Financial understands the ins and outs of private equity as one of India’s top private equity firms, an M&A platform, and a strategic advising platform. Continue reading to learn more about how private equity investments are structured. To begin, let’s review the fundamentals of a private equity fund.
What is the meaning of the term “private equity”?
Funds and investors who make direct investments in private enterprises are referred to as private equity. Because their fundraising window is limited, PE funds are referred to as “closed-end investment vehicles.” Once the window has closed, there will be no more capital accessible. A closed end interval fund can invest in leveraged buyouts, distressed loans, and funds of funds.
What is the objective of private equity?
Private equity’s primary purpose is to manage significant sums of money invested in high-yielding companies. Most businesses have the expertise and know-how to improve operational efficiencies and earnings and turn around underperforming businesses. They also help the company’s bottom line. Working capital, which can be boosted using private equity funds, is a vital sign of a company’s efficiency and short-term financial health.
Why do companies seek private equity funding?
Private equity is a sort of financing that entrepreneurs and business owners can use without worrying about quarterly financial results. PE businesses usually invest for a certain amount of time, usually four to seven years, intending to exit the investment and move on to the next profitably.
Here Swell Financial Services, an Indian private equity firm, wants to talk about how private equity investments are structured.
1. It’s crucial to understand how private equity investments are structured by the knowledge that a fund’s “General Partner” (GP) comprises its partners. Limited Partners (LPs), who are usually institutional investors, are sought for capital commitments. Institutional investors include pension and endowment funds, retirement funds, insurance companies, and high-net-worth individuals.
2. A successful private equity firm will manage numerous funds and create a new fund every few years. Then, using the money they’ve saved, they invest or buy portfolio companies.
3. LPs, in most circumstances, provide cash. They have no say in the enterprises they invest in. Professionals will handle it. If the GP’s performance disappoints the LPs, they may elect not to invest in the PE fund again.
4. Private equity firms are structured as partnerships, with one general partner (GP) making investments and many limited partners (LPs) putting up the money. All of the fund’s institutional partners will sign a Limited Partnership Agreement (LPA) defining the partnership’s terms. Some LPs may seek special terms in a side letter. GPs are responsible indefinitely, whereas LPs are only liable up to the value of their investment in the fund.
5. Common terms in an LPA include the fund’s tenure, the proportion of the management fee, how earnings will be split and paid out, institutional partners’ rights and obligations, and limits imposed on the GP.
6. The cornerstone of a PE fund is usually an LLC or a Limited Partnership. This method safeguards investors while yet allowing them to profit from a company’s growth and success.
7. Limited Partners (LPs) are investors that own 99 percent of a private equity fund’s stock and are only liable for a portion of their investment. The General Partners (GP), who are in charge of the investment’s execution and operation, own 1% of the shares and are accountable.
The four subcategories of private equity are shareholder loans, preferred shares, CCPPO shares, and ordinary shares.
1. Shareholder loans: Shareholder loans are a sort of financing provided by the company’s owners. This is typically a subordinated debt that is part of the company’s debt portfolio and can be traded like a stock.
2. Preferred stock: This is a sort of stock in which preferred stock payments take precedence over standard stock prices.
3. CCPPO shares: This includes cumulative, convertible, participatory, and preferred-dividend ordinary shares, the most common. These are uncommon shares having several unique characteristics, including cumulative dividends.
4. Ordinary shares: These are common stock in a company. Private equity firms have a variety of functions and responsibilities, such as managing funds and participating in limited partnership agreements. In most cases, equity firms are run by a hierarchy that starts at the bottom with analysts or interns and works its way up to partners at the top. To explore how Swell Financial, an Indian private equity business, may assist you in improving your investment and fundraising activities, contact us.
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