July 19, 2024

What is a private equity fund and how does it work?

3 min read
private equity fund

Private equity is capital made up of investors and funds that make direct investments in private businesses that are not listed on a public exchange. They have a good investment horizon, usually between four and seven years, during which the private equity firm wants to exit the investment financially. Initial Public Offers (IPOs) and the company’s selling to a different private equity group or a strategic buyer are examples of exit strategies.

One of their distinguishing characteristics is that private equity funds are not traded on the stock market. Typically, institutional investors, such as High-Net-Worth Individuals (HNIs)and investment banks, that can afford to invest substantial amounts of money for extended periods provide the funding.

How do private equity funds work? 

Limited Partners (LP), who usually own 99 percent of a fund’s shares and have limited liability, and General Partners (GP), who own 1 percent of the shares and have total liability, are the two types of partners in a private equity fund. The GP is also in charge of carrying out and managing the investment.

Many small and medium-sized businesses have grown and developed thanks to the private equity sector. Private equity companies have provided seed capital to all of the unicorn start-ups.

A private equity firm typically makes money and distributes the returns to LPs who invested in its fund when it sells one of the companies in its portfolio to another business or investor. Some businesses backed by private equity may go public.

Unique characteristics of a private equity fund 

  • Private equity firms frequently invest in established companies in conventional industries.
  • Returns are given to the PE investors and the LPs when a private equity company sells one of its investment portfolios to another business or investor. LPs typically receive 80% of the returns, with investors receiving 20%.
  • Private equity makes investments in promising companies using funds pledged by LPs, often acquiring majority ownership (>50%).

Advantages of a private equity fund

Clear potential

The private equity market in India has enormous potential, which is largely unexplored currently. There are many possibilities on the market, ranging from unicorn start-ups to unlisted private enterprises and much more.

Rewards and incentives

Private equity mutual fund management businesses are incredibly picky and invest much money in researching the possible companies they might invest in. Understanding the hazards involved and how to mitigate them is also necessary.

Amounts of funding

Private equity funds are a great funding source because they have no debt. Private equity is a substantial source of seed money for start-up companies.

Selection process

The team that manages and raises private equity invests much effort in choosing potential firms to invest in. Calculating the dangers and possible solutions to the volatility is required for this.

Factors that affect the performance of private equity funds

Funding PE expansion

Recently, private equity has expanded quickly, and the financial firms that design private equity agreements are to blame for this. To ensure that the private equity industry remains lucrative, these firms use investment banks’ knowledge.

Capital raise

A company may opt to sell a portion of its shares to private equity companies for several different reasons. One of these reasons is needing additional funds to operate a firm for a long period.

Regulation of private markets

Companies choose private equity funds for financing since public shareholdings entail numerous strict rules.


Many SMEs in India have experienced rapid growth because of private equity. Many unicorn start-ups have had success obtaining early capital from private equity. Private equity investors choose established businesses, restructure the business to increase revenue, and then resell the company for a profit.

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