Generally, private equity funds are organized as limited partnerships which are controlled by the private equity firm that acts as the general partner. The fund obtains commitments from certain qualified investors such as pension funds, financial institutions and wealthy individuals to invest a specified amount. These investors become passive limited partners in the fund partnership and at such time as the general partner identifies an appropriate investment opportunity, it is entitled to "call" the required equity capital at which time each limited partner funds a pro rata portion of its commitment. All investment decisions are made by the General Partner which also manages the fund's investments (commonly referred to as the "portfolio"). Over the life of a fund which often extends up to ten years, the fund will typically make between 15 and 25 separate investments with usually no single investment exceeding 10% of the total commitments.
General partners are generally compensated with a management fee, defined as a percentage of the fund's total equity capital, as well as a carried interest, defined as a percentage of profits generated by the fund (so long as some minimum return for the investors called the hurdle rate is achieved). Typically, general partners of funds will receive a management fee of 2% and carried interest of 20%. (Although typically, the carry is reduced by the amount of the management fees received). Gross private equity returns may be in excess of 20% per year, which in the case of leveraged buyout firms is primarily due to leverage, and in the case of venture capital firms, due to the high level of risk associated with early stage investments.
Although there is a limited market for limited partnership interests, such interests are not freely tradeable like mutual fund interests. www.wikipedia.org From India
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