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Private Equity Fund Structure 101

private equity fund structure 101

You’ve probably heard the term ‘private equity’ thrown around in financial conversations, but do you really know what it means? It’s much more than a buzzword.

Private equity is a complex investment world, offering substantial returns for those willing to delve deep and understand its intricacies. This alternative investment form involves capital not listed on public exchanges, often used in leveraged buyouts and venture capital funding.

To truly grasp the mechanics of private equity, you need to understand its unique fund structure clearly. This isn’t your typical mutual or hedge fund; it operates on a different playing field.

The fund structure is pivotal in how investments are made and profits are earned for your clients. Here’s everything you need to know about private equity fund structures and how My RIA Lawyer can help.

What are Private Equity Funds?

At the heart of private equity lies the private equity fund, a pool of capital managed by a private equity firm. Contributions from this fund are from various investors, and it is primarily aimed at investing in privately owned companies. Unlike publicly listed companies on stock exchanges, these privately owned companies have distinctive characteristics that make them attractive investment opportunities.

To attract investors, private equity firms, also known as general partners (GPs), outline the objectives, strategies, and expected timeline for investors to realize investment returns.

How Private Equity Funds Work

Private equity funds offer unique investment opportunities that are inaccessible through traditional stock market investments. While there are around 5,000-6,000 listed companies in the United States, there are an estimated 6 million private companies. Private equity funds focus their investment efforts on this vast pool of private companies, capitalizing on their potential for growth and profitability.

Additionally, private equity funds can acquire publicly listed companies and take them private through delisting. This strategy allows private equity firms to exert their influence and implement operational improvements without the scrutiny and short-term pressures of public markets.

To attract investors, private equity partners create an investment thesis outlining the chosen strategy and how it will generate value. The investment thesis document provides in-depth details about partner profiles, the firm’s track record, potential investment opportunities, and the fund’s goals. It also covers aspects such as management fees, minimum participation requirements, and the responsibilities of the private equity firm in managing and enhancing the acquired companies.

Private Equity Fund Fees and Compensation

Fees associated with private equity funds depend largely on the track record of the general partner. GPs with a proven history of delivering above-average returns often charge higher fees. The fee structure typically consists of management fees and performance fees.

Management fees, which range from 0.5% to 3.0% of the fund’s size, cover the operational expenses of the private equity firm. These fees are essential for supporting the day-to-day operations, conducting due diligence, and evaluating potential investment opportunities.

On the other hand, performance fees are directly linked to the investment’s performance and are outlined in the initial investment memorandum. Generally, the first 5% of profits goes entirely to the investors, while any additional profit beyond that is shared between the investors and the GP.

The Four Stages of a Private Equity Fund

A private equity fund’s life cycle duration depends on the liquidity of the acquired companies or assets. Funds focusing on real estate may have a life cycle of less than five years, while those investing in less liquid situations, such as manufacturing or specialized food and beverage companies, may have a life cycle of up to ten years.

The typical private equity fund life cycle includes the following stages:

Capital Raise

This period involves seeking funds from investors and can take up to two years to secure the necessary capital. Success in raising capital depends on a compelling pitch, a competent team, and meeting the minimum investment threshold.

Deal Sourcing

Before the fund’s official launch, the general partners identify potential companies or assets for the acquisition. Demonstrating the feasibility of these acquisitions at reasonable valuations is crucial. The fund usually includes a specified timeframe for making acquisitions or returning investors’ funds.

Post-Acquisition Operational Improvement

Once a company is acquired, the general partners drive its growth. This involves increasing revenue, reducing operating expenses, and implementing operational changes. External leverage often plays a role in achieving these goals.


The fund is liquidated through a trade sale or an initial public offering (IPO). The terms of liquidation are typically defined upfront and depend on meeting specific criteria, such as revenue or income growth. The aim is to achieve a multiple of the initial acquisition value.

How My RIA Lawyer Can Assist You

Private equity is a complex field that requires sophisticated expertise to achieve exceptional returns. At My RIA Lawyer, we have extensive experience working with private equity firms and have seen the industry’s evolution firsthand.

With ever-evolving regulations and increasing scrutiny from regulatory bodies, it is crucial to have a compliance framework that meets all industry standards. Our dedicated fund attorneys will work closely with you to assess your current compliance practices, identify gaps, and develop tailored solutions to mitigate potential risks.

We will prepare the fund documents—including the private placement memorandum, subscription documents, and investor qualification letters. We also ensure proper SEC and state filings are made while providing ongoing compliance support.

Don’t wait. Contact us today for a consultation.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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