Here’s Everything You Need To Know About Private Equity (PE) Funds

Here’s Everything You Need To Know About Private Equity (PE) Funds

A private equity fund is an alternative investment class wherein investors put in capital in non-listed private companies.

What Is A Private Equity Fund?

A private equity (PE) fund is an investment vehicle that pools funds and invests in privately held companies in exchange for an equity share. It falls under Category II alternative investment fund (AIF) category, as per the regulations of the Securities and Exchange Board of India (SEBI)

A PE fund is run by general partners and a management company (PE firm). The management company is the operating entity of the fund and employs general partners who bring in investors, also called limited partners, to invest money in the fund. 

Typically, a PE firm invests for a decade and the minimum investment amount is bigger than other types of investments. This means that most of the investors in a PE fund are generally high-net-worth individuals (HNIs), ultra-high-net-worth individuals (UHNIs) and institutional investors.

What Are The Benefits Of A Private Equity Fund?

Private companies can raise a large amount of funding from PE funds. Such companies don’t just receive financial benefits but also mentorship, networking, expertise and operational support.

A private equity investment helps companies during uncertainty and also for scaling and expansion plans. 

For investors, private equity funds provide an opportunity to tap into the potential of unlisted companies. Investors’ interest is safely guarded by the PE firm as they hold the companies accountable for their actions and transactions.

What Are The Risks Associated With Private Equity Funds?

For investors, one of the biggest challenges with investments in PE funds is that they won’t be able to dilute their shares easily and exit their positions as opposed to funding in listed companies. PE firms also charge high fees, which might affect the ROI. Additionally, the minimum investment required for a private equity fund is way higher than the traditional investment.

For companies, their interest might conflict with that of the PE firm’s. Besides, companies give up a sizable portion of ownership to these firms in exchange for capital. However, this may come with inflexible terms that may not be favourable for the company.


In a private equity firm, general partners are the fund managers who decide the fund size and bring investors on board. They also decide which portfolio companies to invest in and make investment decisions on behalf of the investors. They are responsible for the performance of the fund and earn lucrative performance fees.

Limited partners bring in the capital to the fund with an intent to make lucrative gains. General partners reach out to limited partners for investment in portfolio companies. When both parties come to an agreement, it is called a limited partnership agreement (LPA).

How Do Private Equity Firms Make Money?

Private equity firms majorly make money through management fees and carried interest. In management fees, the limited partners pay the management of the firm a fee, generally about 2% of the fund size.

Meanwhile, carried interest is the certain amount of profit general partners share with limited partners when limited partners make profit from their investment. 

What Is The Role Of A Private Equity Fund Manager?

  • A private equity fund manager implements the fund’s investment strategy and is responsible for generating returns for the investors.
  • The manager researches and oversees analysts and makes important investment decisions.
  • The PE fund manager is responsible for researching potential investments, negotiating deals and overseeing the performance of the portfolio companies.
  • The manager also oversees the performance of the portfolio companies and works to improve their operations. 
  • The manager pitches the private equity firm to potential investors for investment opportunities.

How Can Investors Access Private Equity Funds?

Direct Investments: Investors can directly invest in private equity funds. However, the minimum investment amount threshold is very high, often starting at millions of dollars.

Fund of Funds: A fund of funds is a pool of capital from multiple investors to invest in a diverse portfolio of private equity funds. This provides exposure to a range of private equity investments and minimises risk.

Private Equity ETFs: Private equity extra-traded funds (ETFs) enable regular investors to participate in private equity investments by buying shares of ETFs that track the performance of publicly traded companies involved in private equities, providing potential returns and diversification opportunities to these companies.

Special Purpose Acquisition Companies (SPACs): Investors can invest in SPACs, which are publicly traded shell companies that make private equity investments in undervalued private companies. However, investing in SPACs can be risky and may lack diversification.

How Can An Investor Evaluate A Private Equity Fund?

Begin with assessing the fund’s investment strategy — types of investments it focuses on, target return and plans to achieve its goals. Investors should also check the past performance and rate of return and then compare them to other private equity funds. They must also consider the management fees and carried interest, and understand its impact on the return. 

Investors should check the performance of the fund’s portfolio companies, as their success can translate into potential returns. Lastly, analyse the fund’s investment process, including how investments are selected, due diligence procedure, and the fund’s exit strategy.

What Are The Types Of Private Equity Strategies?

The prominent strategies of PE funds in India are growth capital, buyouts and mezzanine finance.

Growth Capital: Growth capital is the investment in early or growth stage companies to support their expansion plans, research and development, or working capital needs.

Buyout: In this, investors acquire a controlling stake in an established company to restructure and improve its operations to increase profits and ROI.

Mezzanine Finance: This is a combination of debt and equity to provide capital to companies for growth initiatives or acquisitions. The debt becomes equity in case of a default in payment. It offers flexibility and an upside for investors in the form of regular interest payments and potential ownership rights in the company. For the company, the interest rate is generally high but it will not have to dilute equity stake. 

What Is The Process For Raising Funds From Private Equity Funds?

A company can start by defining its funding strategy and determining the type of funding it wants and how much percentage of its equity stake it is willing to give up in exchange for capital. The company should have clarity if it is looking for mentorship or just financial support. After this, it needs to take the following steps: 

Prepare detailed business information and projections: It should research private equity firms. Following this, document key information about the company’s business, including user/customer numbers, revenue and expenditure and include market potential, business model, marketing strategy, and budgets.

Research and identify potential investors: The company should research to identify active investors in the sector and industry to leverage their network to seek introductions or engage with a financial advisor to connect with potential investors.

Create a compelling pitch presentation: The most important aspect of the process is to develop a presentation highlighting the business details in a storytelling way to grab the investor’s attention. The pitch deck must have all detailed business information and projections. Practise the pitch and seek feedback from others to fine-tune it.

Schedule meetings with investors to present the pitch: Now that the pitch is ready and the company has connected with potential investors or PE firms, the company can setup meetings with them to pitch its business. If possible, secure multiple meetings to increase the chances of finding the right investor. Multiple meetings with investors are called a “presentation roadshow”.

Facilitate the due diligence process for investors: Once the investors have shown interest in the company, facilitate the due diligence process for the investors by providing them with the necessary information and evidence. Startups can set up a virtual data room (aka deal room) that is a repository of all relevant documents to streamline the process for potential investors.

Negotiate a partnership agreement: Post the due diligence process, negotiate with investors to reach a mutually beneficial partnership agreement. It is imperative to ensure that the agreement protects the company’s interests and aligns with the long-term business goals. If needed, seek legal assistance to ensure that the minute details of the agreement are carefully considered.

Once the negotiation is complete, finalise the partnership agreement with the investors and sign the deal.

What Is Due Diligence In Private Equity Fund Investments?

Due diligence process in PE investments is a crucial process that the PE firm’s deal team conducts to check which deals are worth pursuing. Once the target companies have been shortlisted, the PE firm will assess the companies’ financial statements, legal and management situation to minimise risks and identify ROI opportunities.

Due Diligence for PE fund managers is complicated as compared with other investment processes because the companies they look to invest in are not publicly listed and certain details may not be easily available. 

The deal team of the PE firm conducts due diligence in two phases – exploratory and confirmatory. Under the exploratory phase, the team examines the commercial activities of the company to understand future prospects. 

After a company passes the exploratory phase, the deal team will take assistance from lawyers, accountants and consultants to confirm or validate the company’s documents. It will dig deeper into the financials, commercial activities, and legal liabilities, will get in touch with the management team of the company, and analyse the tech to understand the risks and sophistication involved in it. 

Why Is Governance Of Private Equity Funds Important?

For investors, fund managers and portfolio companies, governance within PE firms has become very important for the maximum benefit of all stakeholders. PE firms that leverage external or third-party talent can govern the portfolio companies well and maintain corporate formalities in the context of ESG (environment, social and governance).

Meanwhile, for PE firms, corporate governance is increasingly becoming important as limited partners demand transparency and are now focussing on ESG. Limited partners want to ensure that the PE firms are going beyond initiative and policies and are focussing on the implementation of ESG norms.

PE firms are also following these governance norms as they are conscious of their public image. Industry experts believe that ESG implementation will foster responsible investing wherein the due diligence will be conducted thoroughly and will promote sustainable growth of the companies. 

How To Measure The Performance Of Private Equity Investments?

According to Harvard Business School, equity firms can measure private equity by using the following metrics:

Internal Rate of Return (IRR): This is defined as the compounded rate of return on an investment(s). It reflects the performance of a PE fund by considering the size and timing of its cash flows and its net assets while making calculations.

Multiple Of Invested Capital (MOIC): It is the final amount of money divided by the initial investment or an investment’s net total return.

Public Market Equivalent: This measures how close a private equity investment’s performance is to that of the same investment when made into a public stock market during a specific period.