A private equity fund obtains investment commitments from a number of investors – such as SPEAS – and then invests directly in various commercial businesses. The aim is to achieve a return exceeding the return investors could have achieved by investing in listed equities. Investors also obtain diversification of their investments across asset classes.
On investment, private equity funds will try – over a period of ownership of typically three to seven years – to develop these businesses further with a view to optimising the return on investment by a subsequent sale. In this process, the fund will employ its insight, network and particular competencies.
Private equity management companies often focus on specific geographic regions, sectors and stages of the corporate life cycle, where they possess special capabilities for further developing the company in which they have invested.
Investment commitments made to private equity funds are converted into payments concurrently with the rate of investment and incurrence of costs. The majority of investment commitments in a fund are made by institutional investors and wealthy private individuals who in principle also entrust all decisions concerning specific investments and the incurrence of costs to a management company.
The management company, which is owned by a group of individuals with wide experience within private equity investments, has an agreement with the fund to invest and manage the fund assets. The individuals behind the management company are usually also investors in the fund.
The private equity management company receives remuneration for the services performed on behalf of the fund. The remuneration usually consists of a fixed fee in proportion to the capital committed and a variable fee in proportion to the return generated by the capital. The fixed fee usually amounts to 1.5-2.5% of the capital committed per annum, while the variable fee usually amounts to around 20% of the return on the capital invested. Often, the variable fee is only disbursed provided that the annual return exceeds a certain minimum return (the so-called “hurdle rate”) of typically 8-10%.