Private Equity Funds

Last updated: March 22, 2024

What Does Private Equity Funds Mean?

A private equity fund typically refers to a general partnership formed by PE firms which are utilized to invest in private companies. The private equity fund may have general investment criteria (meaning it invests in different industries) or have specific industry criteria. However, private equity funds typically have an investment philosophy that it sticks to throughout its term, which tends to be anywhere between 10 and 13 years. After this time period elapses, the private equity fund is closed by having all funds distributed back to the limited partners.

Private equity funds may invest directly in equity securities of the target investment, in the form of mezzanine debt or in both equity and debt. In general terms, private equity funds often focus on one of the following investment philosophies:

  1. Venture capital — used to finance early stage companies that do not have access to financial markets or conventional financing.
  2. Growth capital — used to fund the expansion of an established private company that is “asset light” and therefore may not be able to use its own assets to secure traditional financing for such growth.
  3. Leveraged or management buyouts — used in combination with additional leverage placed on a company to allow the existing management to take control of the target. The company’s cash flow has to be sufficient to cover the carrying costs of the additional debt.
  4. Distressed or turnaround situations — used when companies are unable to service their existing debt, and the fund’s equity is used to recapitalize the balance sheet along with management conducting a turnaround strategy.

Divestopedia Explains Private Equity Funds

Sellers must ensure they are prepared if they wish to attract an investment from a private equity fund. This is because private equity funds conduct rigorous analysis on the potential future EBITDA, free cash flow generation, and overall balance sheet of the target. The intent is to assess if the selling company can be further improved so that high returns can be achieved when the company is sold and the private investment monetized.

A typical investment hold for a private equity fund is anywhere between 5–8 years, but this timeline is highly dependent on how quickly the investee’s operations can be improved and the general state of the markets. A seller can be well served by working with private equity funds. In addition to the investment capital, the PE firm (usually the general partner of the fund) can provide value by providing financial expertise, customer relationships, and overall strategy expertise that the target’s principal may not have.


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