PRIVATE

EQUITY

Prepared By:
PRIYAM PAL
WHAT IS A PE FIRM ?

Private equity firms invest the money they collect on behalf of the fund's investors,
usually by taking controlling stakes in companies. The private equity firm then works
with company executives to make the businesses — called portfolio companies —
more valuable so they can sell them later at a profit.

WHAT ARE THE TARGETS OF PE

START-UPS

ESTABLISHED
COMPANIES

DISTRESSED
COMPANIES

STARTUP COMPANIES - Private Equity Firms have MEDIUM RISK while investing in
these companies as they are already running a successful business.

ESTABLISHED COMPANIES - Private Equity firms have LESS RISK while investing in
these companies as they have good Management structure, financials and
operations. They do not expect Huge returns in these companies.

DISTRESSED COMPANIES - The risk is the HIGHEST while investing in these

companies because they have bad Financials, Low Management quality. They invest
in these companies at a very Low rate and works in them so they can make them
more valuable later and sell them at a profit.

WHO INVESTS IN PE FIRM ?

LIMITED HIGH NETWORTH

INSTITUTIONS
PARTNERS [LPs] INDIVIDUALS [HNIs]
 Private equity funds are closed-end funds that are not listed on public exchanges.
Their fees include both management and performance fees.
Private equity fund partners are called general partners, and investors or limited
partners.
The limited partnership agreement outlines the amount of risk each party takes
along with the duration of the fund.
Limited partners are liable for up to the full amount of money they invest, while
general partners are fully liable to the market.

PARTNERS AND RESPONSIBILITIES

LIMITED PARTNERS [LPs] - LPs are essentially the investors in the fund and
contribute capital to be pooled and invested. These are typically institutional
investors, which can include pension funds, sovereign wealth funds, insurance
companies, family offices, university endowments and high net worth
individuals. Limited partners have no influence over investment decisions.

GENERAL PARTNERS [GPs] - the private equity fund’s partners are known as
general partners. Under the structure of each fund, GPs are given the right to
manage the private equity fund and to pick which investments they will include
in their portfolios. GPs are also responsible for attaining capital commitments
from investors known as limited partners (LPs).
INVESTMENT AND PAYOUT STRUCTURE

1. Fund Formation:
Private equity funds are established by general partners (GPs) who seek
capital from limited partners (LPs), such as institutional investors, pension
funds, endowments, and high-net-worth individuals.

2. Capital Commitment:
LPs commit a certain amount of capital to the fund over a specified
investment period. This commitment is not immediately called upon but
can be drawn down by the GP as needed for investments.

3. Drawdowns:
GPs request capital (drawdowns) from LPs as investment opportunities
arise. This allows the fund to make acquisitions and investments in
portfolio companies.

4. Investment Period:
The fund typically has an investment period during which the GP actively
deploys the committed capital into various investments, often spanning
several years.

5. Portfolio Companies:
The fund invests in private companies (portfolio companies) with the aim of
improving their performance, increasing their value, and ultimately
realizing a profitable exit.

6. Management Fees:
GPs charge management fees, usually a percentage of the committed
capital, to cover operational expenses, salaries, and other ongoing costs.
This fee is charged annually throughout the fund's life.
7. Carried Interest (Profit Share):
GPs receive carried interest, which is a share of the profits generated from
successful investments. Carried interest is typically a percentage of the
fund's profits, often 20% but can vary.

8. Hurdle Rate:
Some funds may have a hurdle rate, a minimum rate of return that must be
achieved before GPs are entitled to carried interest. This ensures that LPs
receive a certain return before GPs participate in the profits.

9. Distribution Waterfall:
Profits are distributed according to a waterfall structure. Initially, the LPs
receive a return of their capital. After meeting this hurdle, profits are
distributed between LPs and GPs based on the agreed-upon carried interest
percentage.

10. Exit Strategies: -

GPs work towards exit strategies for portfolio companies, such as selling
them through initial public offerings (IPOs), mergers and acquisitions (M&A),
or secondary sales. The proceeds from exits are distributed to LPs
according to the distribution waterfall.

11. Winding Down: -

Once all investments are exited, and remaining funds are distributed, the
fund is typically wound down, and any remaining profits are distributed to
the LPs.
 LIFE CYCLE OF PE FUND

FUND INVESTMENT
DIVESTITURE
FORMATION PERIOD

TIME - TIME - TIME -

2 Months - 2 Years 2 Years - 10 Years 1 Year - 3 Years

FAQs
Q1. Why Are Investment Bankers Drawn to Private Equity?
Overall, investment bankers want to work in private equity for the following
reasons: its benefits in the long run, greater control over investment decisions,
and better professional and entrepreneurial opportunities. Also, compensation
tends to be higher in private equity firms.

Q2. Do You Need to Do Investment Banking Before Private Equity?

Private equity firms typically don't hire straight out of college or
business school. Firms often prefer candidates with a strong professional
background in investment banking, expecting at least two years of
experience as an investment banking analyst.
 WHOM DOES PE FIRMS HIRE ?
Overwhelmingly, private equity firms hire:

Investment Banking Analysts at bulge bracket and elite boutique

banks, as well as a few In-Between-a-Banks
Undergraduates for junior-level roles, such as Private Equity Analysts
(common in some markets, such as Brazil and Portugal, and
increasingly common at mega-funds and upper-middle-market funds in
developed markets)
Professionals who already work in PE at different firms
And smaller firms also hire IB Analysts at middle market and boutique
banks.

JOB ROLES IN A PR FIRM

Analyst: Entry-level position responsible for conducting research, financial

analysis, and due diligence on potential investment opportunities.

Associate: Involved in deal sourcing, execution, and portfolio management.

Associates work closely with senior team members and are responsible for
various aspects of the investment process.

Vice President (VP): VPs play a more senior role in deal execution and are
responsible for managing relationships with clients and portfolio companies.
They often lead deal teams and play a crucial role in decision-making.

Director: Directors are typically experienced professionals responsible for

sourcing deals, managing client relationships, and overseeing the execution
of transactions. They often have a strategic role in shaping the firm's
investment strategy.

Principal: Principals are senior professionals who may lead deal teams,
contribute to the firm's overall strategy, and play a key role in decision-
making.

Partner/Managing Director: These are top-level executives who are involved

in high-level decision-making, fund management, and setting the strategic
direction of the firm. They often have a significant stake in the success of the
firm.