Private equity funds are an excellent choice for those looking to invest in a private company. The fund’s limited liability structure provides investors with limited liability, which allows them to risk only the amount they invest. Additionally, the limited liability company is considered a pass-through entity for federal income tax purposes. Private equity funds are usually organized around a General Partner and Management Company. The General Partner assumes all legal liability and the Management Company employs investment professionals.
Private equity funds generally invest in private companies with a strong future. Their goal is to increase the company’s value by implementing various strategies, such as changing management or enhancing product lines. Typically, a private equity firm owns a majority stake in several companies, called a portfolio. These companies are then sold to investors in the form of stock or debt. While private equity funds are often risky, they can yield excellent returns if the investment is done correctly.
The fees associated with private equity funds vary greatly. Large buyout funds charge approximately 1.5% to 2% of their assets under management and 20% of the profits realized by the fund. Profits are mostly realized through capital gains from the sale of portfolio businesses. Private equity firms often finance acquisitions with high levels of debt in order to improve returns and cover their high management fees. They also look for companies that can maintain stable cash flows and have limited capital investment requirements. They should also have a small to moderate amount of future growth and be able to enhance their companies’ performance in the short to medium term.