Table of Contents

Private Equity Fund Definition

Written by Paul Boyce Posted in Finance
Last Updated January 20, 2023

What is a Private Equity Fund?

Equity is the value of ownership in a company or asset. It is the share an individual or entity has. Investors can trade a companies’ equity on the stock exchange for the market price and sold to others who might want it.

There are many ways that investors can invest in companies, but one way is by purchasing equity from them through a private equity fund, typically called “PE.” This means you’re not buying shares themselves but rather a stake in the fund that has shares from different types of business ventures within it. In other words, you own a share of the fund, which in turn owns shares in a multitude of businesses. So the value of the fund is the value added by its investments in those assets.

Key Points

A Private Equity Fund is an entity which owns shares in a multiple number of businesses.
Buying shares in a Private Equity Fund means that you own shares of the fund, but not of the businesses it owns.

A private equity fund is a capital pool collected from different investors to fund the operations of ventures, typically smaller companies. It is a way of pooling resources across different investment sources to create a collective capital fund.

This allows for the fund to invest in many different types of property and business ventures and then sell that stock to the public at a later time, potentially resulting in better returns for the original investors. The advantages of investing in funds instead of investing individually are that there are many more options available for investing, which can increase the chance of achieving higher returns on your investment; however, there are also disadvantages.

What is Private Equity?

A private equity fund is structured to manage the money of those who invest through it. This is done by purchasing equity in other ventures or property and reselling it at a later time with the hope of a profit.

Private equity firms take on this responsibility instead of performing these tasks. This is because they are able to leverage the combined funds of its investors to achieve a good deal. These funds will then aim to pick up an underperforming business, turn it around, and sell later for a profit.

How Private Equity Funds Work

Private equity firms collect money from investors to invest in other ventures, companies, or real estate. These funds can do this because they have invested a certain amount of money into these assets that are available for private equity firms to use.

The private equity firm then purchases that amount of stock in the asset again and resells it to the public at a later time at a higher price than when they originally purchased it. This is typically done through an opening of an initial public offering (IPO).

The fund receives the money from the IPO and then distributes it back to the original investors. This is done in a certain period of time, which is commonly a few years. The anticipated return on investment is based on this projected idea of when the IPO will take place and the profit earned through reselling the stock.

The process that private equity firms use to make their investments may vary slightly depending on if they are going into a new business or buying another firm’s business. Sometimes, a company will create a particular type of stock that can only be bought from the firm to purchase another business. This means that there is no other way for investors to get stock in that business but through the private equity firm and will therefore pay more for that stock because they have no other way to get it.

Types of Private Equity Funds

There are three main types of private equity funds:

1. Venture Capital Funds

These funds buy equity in small companies that have a great deal of potential and hope to turn them into the next great big hit. They may also invest in private equity funds to take over a company and make it their own. Venture capital funds are typically funded by one person or company. They are a little riskier and tend not to have as much capital available as an investment fund would.

2. Growth Capital Funds

This type of private equity fund is more centralized and has more capital available to invest with. They tend to invest in companies that have already received funding from a venture capital firm or are looking for funding again. They typically buy a portion of a company and negotiate with the owners over a certain amount of time to purchase the rest of it. Growth capital funds are themselves backed by venture capital firms.

3. Buyouts

This type of private equity is when a firm takes over a company. They invest in the company to take it over and then resell it at a higher price. Depending on the situation, buyout firms can be venture capital firms or growth capital funds.

The main reason these firms provide their services is to earn money through reselling companies they invest in or take over, so they must ensure that the companies are profitable for them to make a profit through reselling them. Buyouts can either be management buyouts or leveraged buyouts. Management buyouts involve management taking over a company, while leveraged buyouts involve all the debt being bought out. In some situations, buyout firms can go in and purchase and take over a company that is already failing or too expensive to run.

The Benefits of Private Equity Funds

There is no denying that private equity investment funds can provide the greatest rewards to investors. Here are the benefits that investors receive from private equity funds:

1. Economies of Scale

This refers to the benefits of having a larger group of people working together on a project. This can allow the investment group to take better care of the company, especially in difficult times like recessions. This is a major reason private equity firms can do so well during these times.

2. Economies of Scope

Private equity firms and their investors benefit from economies of scope because they can pool their resources together. This means that if any one of the members handles something improperly, the whole group is affected, even though it was only that person’s job. Decisions are made at a higher level when dealing with private equity funds, which makes them more profitable for investors who do not have to worry about choosing what investment to make.

3. Selection

Private equity firms have access to a variety of different types of companies that they can choose from. They can either choose one that they think will be successful or one that is completely random and has very little chance of pulling off whatever it is their goal is.

4. Higher Returns

The more money that a company has, the more profitable it is for the private equity firm to invest in the company. This means that investors will have to pay a higher price for the investment, but they will also have a greater chance of making more money than they would if they were investing in companies with lower profit margins. However, there are also disadvantages to this model.

5. Creation of SPV

The creation of a special purpose vehicle allows the private equity firm to buy up or take over a company without being directly affiliated with the company or being an employee of the company. This increases the amount of capital that can be used to invest in a particular business, and investors do not have to worry about losing their jobs because they have invested too much in the specific business.

6. Sharing of Risk

Because private equity firms hold a large portion of a business’s equity, they can share the risk of taking over the business. If they cannot make any money off of it, then they do not lose any money when the company goes under. This means that investors do not have to worry much about losing their money because it is spread out among many people.

7. Service

Private equity firms can provide a service where they will take over a company and help it become more profitable due to the increased resources and skills they contribute. This allows companies to become more competitive and leads to a more fulfilling life for the company’s employees.

These are just some of the many reasons investors invest in private equity funds. They receive many benefits from them, but many disadvantages can be associated with private equity investment funds.

The Bottom Line

Private equity investment funds can provide the greatest reward to investors. The investors receive greater returns because they invest in companies that can attain economies of scale and scope. They also do not have to worry as much about losing their money because the risk is spread out among many people. The most important aspect of private equity firms is that they provide a service for business owners and entrepreneurs who cannot get loans from banks or who have had trouble getting loans from banks. While these types of funds might not be worthwhile for investment, they are very helpful when starting up a business or turning around an existing company.

Private Equity Fund FAQs

What are the three types of private equity funds?

There are three key types of private equity strategies: venture capital, growth equity, and buyouts.

What happens at the end of a private equity fund?

At the end of the life of a fund, remaining investments are liquidated. Proceeds are distributed. Limited extensions to fund term possible – usually 2 years at the discretion of the GP and then longer if a majority of investors wish it.

About Paul

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.