PRIVATE EQUITY FIRM E
REGISTRATION E
PARTNER E
MASTER FUND E
FEEDER FUND E
MANAGEMENT FEES E
Commitment based fee.
Cost of the investment/ invested capital.
NAV (net asset value) of the fund.
Conversion/Switch based fee.
WATERFALL DISTRIBUTION E
Return of capital
Preferred return
Catchup
Carried interest
TYPES OF WATERFALL DISTRIBUTION E
[Link] WATERFALL DISTRIBUTION
[Link] WATERFALL DISTRIBUTION
LIMITED PARTNERSHIP AGREEMENT (LPA)
PRIVATE PLACEMENT MEMORANDUN (PPM) E
CAPITAL COMMITMENT E
CAPITAL CALL NOTICE
CONTRIBUTION
DISTRIBUTION
RECALLABLE DISTRIBUTION
UNFUNDED COMMITMENT/REMAINING COMMITMENT
FIRST CLOSE E
ADJUSTMENTS IN FEE CALCULATION E
STEPDOWN METHOD
SIDE LETTERS E
TIER BASED FEE E
PERFORMANCE FEE/INCENTIVE FEE/ CARRIED INTEREST E
HURDLE RATE E
PREFERRED RETURN E
CATCHUP E
CLAWBACK E
HEDGE FUND
HIGH WATERMARK E
CRYSTALIZATION PERIOD E
SPINOFF, SPLITOFF
Corporate Action E
A. MANDATORY CORPORATE ACTION:
B. VOLUNTARY CORPORATE ACTION
C. MANDATORY WITH CHOICE
PRIVATE EQUITY FIRM
Private equity firm pools the money from Wealthy Investors Like
a. High net worth individuals,
b. Institutional investors,
c. Sovereign wealth funds etc
And invest into different asset classes like
i. Shares of Start-up companies,
ii. Real Estate assets Like shopping malls, offices, Parks, etc
iii. Infrastructure Projects like Roads, Bridges, Airports, etc
To give return to investors.
REGISTRATION
These private equity funds are registered as limited liability partnership LLP
PARTNERS
The partners are classified into 2 types
a. Limited partners
b. General Partners
LIMITED PARTNER
Limited Partner is the person who invests into the Fund.
GENERAL PARTNER
General partner is the person who is responsible for management and operation of
private Equity Fund.
MASTER FUND
Master fund is the main fund which is raised the investment where GP and majority
of the investors are located in a country
It is also called as “ON SHORE” fund
FEEDER FUND
Feeder fund is a fund which pools investment capital and invests into master fund
MANAGEMENT FEES
Fee charged by GP for managing the fund
As per 2:20 Rule Management fee rate is 2%
Common methods are followed in this industry are
1. Commitment based fee.
2. Cost of the investment/ invested capital.
3. NAV (net asset value) of the fund.
4. Conversion/Switch based fee.
[Link] BASED FEE
In this method, investor has to pay the fee on commitment given by the investor.
This is most common method in the industry.
[Link] OF THE INVESTMENT/ INVESTED CAPITAL
In this method investor has to pay the fee only on amount invested by the fund
[Link] (NET ASSET VALUE) OF THE FUND
In this method investor has to pay the fee on NAV of the fund
4. CONVERSION/ SWITCH BASED METHOD
In this case, fee method will be changed/switched from one to other during the
fund’s life time.
WATERFALL DISTRIBUTION
Waterfall Distribution provides the order in which the gains from pooled investment
is allocated among the investors and GP in that pool.
There are 4 tiers in a waterfall distribution
1. Return of capital
2. Preferred return
3. Catchup
4. Carried interest
RETURN OF CAPITAL:
100% of distribution goes to investors until they RECOVER all of their initial capital
contribution.
PREFERRED RETURN
100% of distribution goes to investors until they RECEIVE their preferred return
This is the minimum return the investor is expecting from the fund, before agreed to
share the profit with GP
Preferred return = Amount invested * Hurdle rate
CATCHUP
Standard percentage of distribution goes to GP as a catch up
Catchup provision will give exclusive right to GP to take/share the cash left after the
preference return payment up to 20 to 25% of preference return Amount
CARRIED INTEREST
Private equity fund collects Performance fee/ incentive/ carried interest fee from
investors if the fund performs well/generates profits
Standard percentage of profit goes to GP as a carried interest
As per 2:20 Rule Carried Interest is 20%
TYPES OF WATERFALL DISTRIBUTION
There are 2 types of waterfall distributions that are mostly used in the industry
[Link] waterfall distribution
[Link] Waterfall distribution
EUROPEAN WATERFALL DISTRIBUTION – Popular and widely used
European waterfall distribution is applied at an aggregate fund level
Benefited to LP (Investor)
GP is received their carried interest only after the investors received their capital
and preferred return
AMERICAN WATERFALL DISTRIBUTION
American waterfall distribution is applied on deal-by-deal basis
Benefitted to GP
As GP is received their carried interest before investors received their capital
LIMITED PARTNERSHIP AGREEMENT (LPA)
LPA is agreement between the partners in that fund
This LPA will have all the details about the fund like
1. Tenure of the fund
2. Rights of the partners in the fund
3. Management fee terms like management fee, method, Percentage, etc
4. Incentive fee terms like fee rate
5. Due dates to report the NAV (Net asset Value)
6. Due dates to send financial statements of the fund to investors etc.,
PRIVATE PLACEMENT MEMORANDUN (PPM)
It is a Document which contains details about the proposed fund, different expenses in
the fund, track record of that fund house to manage similar funds.
CAPITAL COMMITMENT
Capital commitment is the amount of money an Investor promises to pay to Private
Equity fund
CAPITAL CALL NOTICE
When the fund finalizes an investment opportunity or
They need money to pay management fee etc.
they will call the money from each investor by issuing capital call notice
CONTRIBUTION
If the investor pays any amount against the capital call notice it is called contribution
made by the investors to the fund
DISTRIBUTION
Distribution generally refers to disbursements of assets from a fund to investors
Types of Distribution
INCOME DISTRIBUTION: Fund receives interest, dividend etc., they will distribute
that money to investors
CAPITAL DISTRIBUTION: Amount distributed after the sale of investment
IN KIND DISTRIBUTION: When the fund invested in a company, that company went
for IPO this fund distributes the share of that company to investors in the fund.
RECALLABLE DISTRIBUTION
A Distribution to Limited partners on which GP has right to call back again
if GP finds any good investment opportunities in near future
UNFUNDED COMMITMENT/REMAINING COMMITMENT
This is balance amount payable (BAP) by investors to the fund at a point of time
Unfunded commitment (UFC) = Commitment - contribution + Recallable Distribution
FIRST CLOSE
Close means finalization of list of investors and their commitments, new investors
are not allowed after that unless the fund has 2nd close
ADJUSTMENTS IN FEE CALCULATION
Since these PE funds have wealthy investors, less no. of investors in the fund, these
investors are knowledged
there will be many negotiations that leads to money adjustments in the fund’s fee
calculations
Some of the common/Popular adjustments are given below:
STEPDOWN METHOD
In this case, the fee rates will be decreased over a period like 2% in 1st year can be
reduced to 0.5% by 10th year
SIDE LETTERS
Side letter means a separate agreement is entered into between one/set of
investors and the GP
TIER BASED FEE:
This is common adjustment where
the fee rates are less for the investors who invested more and
the fee rates are more for the investors who invested less
PERFORMANCE FEE/INCENTIVE FEE/ CARRIED INTEREST
Private equity fund collects Performance fee/ incentive/ carried interest fee from
investors if the fund performs well/generates profits
Standard percentage of profit goes to GP as a carried interest
As per 2:20 Rule Performance fee rate is 20%
HURDLE RATE:
This is the rate at which the fund should generate return to get the eligibility for
carried interest by GP
CLAWBACK
Claw back is a provision by which LP can take back the excess carried interest
amount paid to the GP
HEDGE FUND CONCEPTS
HIGH WATERMARK
High watermark is the highest level of value reached by investment account or
portfolio
This is the level at which hedge fund took incentive fee in the past
The fund can take incentive fee next time only if the fund crosses this highest
watermark.
CRYSTALIZATION PERIOD
This is the point at which the GP/Fund manager can take carried interest If the fund
is making the profit
This will be decided at the time of launching
Generally, 6months or 1year
SPINOFF
Distributes shares of the new subsidiary to existing shareholders
SPLITOFF (Parent company or subsidiary)
Shares of the new subsidiary to shareholders
But they have to choose between parent company & Subsidiary company
CORPORATE ACTIONS
Any action taken by the company which significantly influences the stake holders of
the company
3 Categories
[Link] CORPORATE ACTION:
Investor should participate
Bonus shares, Dividend, Stock Split, Merger, Acquisition (BDSM)
[Link] CORPORATE ACTION
Investor choice to take this or not
Example: Right issue, Buy back of shares
[Link] WITH CHOICE
Dividend declared and
shareholder has an option to take in cash or kind
I2R4T2F
Private equity Mutual funds Hedge fund
Investors Wealthy Investors like Retail Investors like Wealthy Investors like
High net worth individuals Salaried High net worth
Institutional investors employee individuals
Sovereign wealth funds Small business Institutional
(government of investors
Singapore, Dubai etc) Sovereign wealth
funds (government
of Singapore, Dubai
etc)
Investment Invest in Invest in Invest in
in Shares of Start-up Listed companies listed securities
companies Government Bond Derivates etc
Real Estate assets Like Debentures
shopping malls, offices,
Parks, etc
Infrastructure Project like
bridges, Airport, Roads,
etc
Risk Medium to high Low High
Return 20 % 6 to 14 % 20%
Regulatory Less More Less
control
reporting
Registration Limited partnership / LLC Trust Limited partnership / LLC
Type of closed ended Open ended open ended
fund
Tenure Closely ended fund has a life of Open ended fund has no Open ended fund has no
10 years limit limit
Fee Management fee, incentive fee Management fee Management fee,
incentive fee