How a Private Equity Fund Works

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A private equity fund invests in businesses to help them grow. It does so by buying shares of a company from a General Partner or other investors. The General Partner then sells the shares to a strategic buyer. That buyer is typically a large platform company looking to acquire technology or enter new markets. The limited partners in a private equity fund have a number of options for exiting their investment.

Private equity firms are structured as partnerships in which one General Partner manages the fund and several Limited Partners contribute capital. The General Partner is responsible for identifying the investments while the Limited Partners provide the capital. The Limited Partners don’t necessarily have discretion over investments and often delegate that role to the General Partner. This structure can be advantageous to investors.

The process of forming a private equity fund can take several years to a decade. The timeframe depends on several factors, including the level of experience of the private equity firm. Some seasoned private equity firms go through a rolling process, with plans for the next fund already in place at the beginning of the previous fund’s life cycle.

After the fund raises enough capital, deal sourcing begins. During this phase, the General Partner sources potential investments, performs due diligence on the companies he intends to acquire, and negotiates terms sheets with the target companies. The General Partner then closes the deals and “calls” the capital from the Limited Partners.

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