Private equity funds
Direct investment in private companies
Private equity funds pool investors money to invest directly
into private companies. Here we explain how private equity funds
work, what sort of companies they invest in and how you can gain
exposure to this type of investment.
What is a private equity
A private equity fund is a fund that invests directly in private
companies by providing capital and management expertise to help
them become more profitable.
There is no standard structure for a private equity fund,
however in Australia, private equity funds are usually unit trusts
or limited partnerships.
Who can invest in private
Private equity funds are for sophisticated investors. Typically
capital is raised from institutional investors such as super funds,
life insurance companies, funds of funds and other companies.
Family offices, trusts and wealthy individuals may also invest in
private equity funds.
Private equity investors use this type of investment to add
diversification to their portfolios and expect higher than average
returns than those of traditional equity investments, because they
are taking on bigger risks to achieve potentially higher
Private equity funds are usually not available to retail
investors as the minimum investment is often $500,000 or higher,
however retail investors may have exposure to private equity funds
through their superannuation fund.
How do private equity funds
Private equity funds use investors' capital to buy a stake in
private companies that are looking to expand, develop new products
or services or need to be turned around to remain viable. This
usually involves the private equity fund buying a share in a target
company, taking an active management role in the company and
providing expertise in areas such as business development,
marketing, financial analysis and business networks.
This high level of involvement has often led to private equity
investments achieving higher returns than standard equity
investments, although not without increased risk.
Private equity investment life cycle
Private equity investments take an average of 5 to 7 years to
reach their potential, however investors money could be tied up for
longer. A private equity investment will usually go through the
- Company investment - The private equity fund
buys or commits to invest in a company it thinks can profit from a
capital injection and/or management expertise. Funds may be drawn
down gradually over the first 5 years of the investment.
- Additional management - A representative from
the private equity company will join the board of the investee
company, usually someone with expertise that matches a
- Add value - Private equity managers will focus
on growing the business and adding value through financial support,
restructuring, corporate governance and operational
- Exit investment - The private equity fund will
then usually sell the investment, through an initial public offering (IPO), a backdoor listing, a sale to a third party
who may operate in the same industry or a sale to another private
equity company who specialises in later-stage businesses. They
could also exit the investment through a share buyback
arrangement, or via a liquidation if the company has failed.
- Return of funds to investors - Finally any
capital and profits, less fees, will be returned to investors.
Private equity investments are long-term investments, that are
likely to be close-ended which means investors need to be committed
for the life of the fund.
Private equity fund fees
The fee structure of private equity funds is often higher than
that of other managed investment funds. Fund managers charge a
fixed management fee, typically 1-2% each year, as well as a
performance fee (often referred to as 'carried interest') that
applies once pre-determined performance hurdles are met.
What do private equity funds
Private equity funds invest in companies seeking a capital
injection into their business. There are many reasons a company may
be looking for a private equity partner. Common reasons
- They are in early stages - The company has a
product or service that has potential for growth but needs a
capital injection and/or management expertise to expand and
- They are in distress - They might be able to
be turned around with a business restructure.
- The owners want to exit - If the owners want
to retire or start a new business they might want to sell their
Private equity funds are a long-term investment
strategy, suitable for sophisticated investors and large
institutions that have substantial amounts of money to invest.
Retail investors may be able to gain exposure to private equity
investments through their super fund. Risks can vary between funds
so investors need to do careful research before committing funds to
a private equity investment.
Last updated: 15 Aug 2017