A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

MAIN ACTORS AND STRUCTURES

As already mentioned in section 1.1.3, the GP has to commit an amount of capital to its own fund, so as to align the interests of the LPs with those of the GP.

In order to keep the fund running, the GPs receive a management fee (the service fee paid in consideration for the management services performed to the benefit of the fund), as well as a percentage of the profits, a carried interest used as an equity incentive. The value of this equity interest in the future profits of the fund depends on the fund performance (e.g. 20% realised gains).

As previously seen, all these items agreed on between the GP and the LPs are set out in a limited partnership agreement.

2.1.2

Limited Partner

The term LP refers to parties which invest capital in private equity, generally through specialised funds or investment companies rather than by investing directly in the capital of a company. LPs may be institutions (pension funds, banks, insurance companies, etc.), corporates, high net worth individuals or fund of funds. Considering the level of risk, long-term return expectations and usually lightly regulated charac- teristic of private equity, the investment in private equity funds is for the large part reserved to well-informed investors. Investors in private equity are generally attracted by the opportunity to generate potentially higher long-term returns, whilst improving the diversification of their portfo- lios. Their liability is limited to the capital contribution. In exchange for the cash they provide, the LPs receive income, capital gains, dividends and leverage on the possible tax advantages the fund itself benefits from. Investments in private equity vehicles are typically performed by the signature of an irrevocable subscription agreement , by which the investor commits himself to invest into a private equity vehicle a substantial amount of money, called on in partial payments during the first few years of the fund’s life cycle.

The profile of private equity investors generally depends on the business stage of development, as shown in the following figure:

Figure 22: Profile of investors depending on the business stage of development

Expansion-Stage financing - Initial expansion - Intermediate expansion - Bridge

Early-Stage financing - Seed - Start-up

Stage of development

Acquisitions and Buyouts

- Founder capital - Private investors

- Founder capital - Angel investors - Private investors

- Private investors - Venture capital funds - Institutional investors - Government-backed corporations - Corporate strategic investors

- Venture capital funds - Institutional investors - Government-backed corporations - Corporate strategic investors

Profile of investors

- Venture capital funds - Institutional investors - Government-backed corporations - Corporate strategic investors

Type of investment

- Higher risk/higher return - Equity

Equity subordinated debt

Lower risk/lower return

Source: Industry Canada, 2009

page 36 | A thorough understanding of PE