Learn about private equity
What is a Private Equity Fund?
Private Equity ("PE") Funds
The majority of PE investments are made through closed-end PE Funds managed by professional PE managers. A fund manager typically raises capital for a PE Fund from investors using a limited partnership structure. The fund manager performs the role of general partner ("GP") and makes key investment and management decisions. Investors are known as limited partners ("LP") and have a limited influence on the Fund's investment decisions.
Limited Partner Structure
The year in which a fund commences its operations or begins to draw capital from its investors is typically referred to as its "vintage" year. Under this structure, the GP directs capital into Investee Companies as investments and usually acquires a majority ownership position in order to exercise meaningful control of the company's board, governance, and operations.
PE Fund Strategies
Generally, PE Funds aim to improve the financial performance of investee companies and help realise their growth potential. They do so by investing in such companies and making operational improvements. Each investment is usually between 3-7 years, after which the fund managers will seek to realise profits on these investments either through a sale or an initial public offering ("IPO").
PE Funds are categorised by the investment strategies they employ, each with varying risk, return, and liquidity profiles. Key investment strategies employed by PE Funds are:
Purchase of controlling stakes in an investee company often resulting in the control over the investee company's assets and operations and involving acquisition leverage
- Growth Equity
Investments in profitable but still maturing companies which are seeking capital to expand or enter into new markets
- Real Estate
Investments in real estate properties
- Private Debt
Investments in an array of illiquid credit instruments
- Venture Capital
Investments in start-up or less mature companies which are expanding
Diversified Investments by PE Funds
Individual PE Funds attempt to achieve a certain level of portfolio diversification, and each PE Fund's Limited Partnership Agreement ("LPA") generally contains provisions limiting the concentration of any single portfolio investment within its regional and sector remit. The result is typically a portfolio of ten or more investee companies, made over a multi-year period.
PE Industry Trends
Significant Growth in AUM
The PE industry’s assets under management (“AUM”) has enjoyed significant growth of approximately 12.8% per annum since 2000. The AUM, valued at approximately US$7.6 trillion as at 30 June 2021 (Fig 1.), comprises both unrealised value of PE investments under management and available capital for investment, or “dry powder”.
Fig. 1: Evolution of PE AUM
Source: Preqin, December 2021. Data about private equity assets under management under “Breakdown of Assets Under Management Over Time” as of 30 June 2021 obtained from the website at https://www.preqin.com/user/pe/ aum.aspx, last accessed on 4 January 2022.
PE Funds AUM
Data as of 30 June 2021 shows that U.S.-focused PE Funds represent the majority of global PE AUM (57%), followed by Asia, Europe and the remaining Rest of World ("RoW") (Fig. 2). In terms of strategy, Buyout represents the majority of global PE AUM (40%) (Fig. 3).
Fig. 2: Regional Breakdown of PE AUM
Fig. 3: Strategy Breakdown of PE AUM
Strong Fundraising Environment
Beginning in 2013, the PE industry has experienced annual net cash distributions which have supported a strong fundraising environment as investors seek to redeploy capital inflows into new fund commitments. Fundraising activity has grown steadily with the annual aggregate capital raised reaching a new peak in 2021. 2021 recorded aggregate capital raised of approximately US$1.0 trillion across over 2,640 funds.
Fig. 4: PE Fundraising
Increase in PE Deal Activity
In the meantime, PE fund managers have found this environment attractive to monetise their mature investments. Per Figure 5, 2021 recorded positive Buyout exit momentum with aggregate exit value up approximately 47% year-on-year to approximately US$868 billion. The majority of Buyout exit value in 2021 was achieved by selling the portfolio companies in trade sales to other market participants and competitors (38%) and to other PE Funds (32%), while the balance was split mainly between mergers (13%), public listings through IPOs (13%), and recapitalisations, restructurings, or sales to management (4%).
Fig. 5: Company Exits from Buyout Funds
Other topics in
- What is Private Equity?
- What is a Private Equity Fund?
- Investing in Private Equity Funds
- Risks in Private Equity
- McKinsey Global Private Markets Review 2022
- Bain & Co Global Private Equity Report 2022
- Fitch Ratings Special Report - PE CFOs Stable After Coronavirus Recovery
- Fitch Ratings – PE CFO Update: 3Q21
- McKinsey Global Private Markets Review 2021
- Bain & Co Global Private Equity Report 2021
- Bain & Company Global Private Equity Report 2020
- McKinsey Global Private Markets Review 2020