Private Equity Fund

A private equity fund is a closed-end vehicle that raises capital from institutional and wealthy investors, uses it to acquire majority or larger minority stakes in unlisted companies and sells them again after a number of years. In Germany it is regularly structured as a limited partnership with a limited liability company as general partner, in which investors are limited partners and the manager runs the business. The manager is regulated under the German Investment Code, which requires either registration or a full licence depending on assets under management.

A ten-year term with two one-year extension options is standard, alongside an investment period of around five years. The manager is remunerated through roughly 1.5 to 2 percent management fee and 20 percent carried interest above a preferred return of usually eight percent. These are guide values only, as actual terms vary by fund and market environment. Committed capital is not paid in at once but called down as investments arise.

The fund should be distinguished from two forms that have their own entries in this glossary. A fund of funds invests not in companies but in other funds and thereby creates a second layer of fees. A continuation fund takes over one or more holdings from an expiring fund run by the same manager in order to extend the holding period. Depending on strategy a portfolio comprises around ten to twenty-five holdings, because the investment team's capacity to support them is limited.

A manager is assessed on completed vintages, measured by capital multiple and by annual return after fees. Undrawn capital is not free liquidity for the investor but an obligation callable under the fund terms that has to be reserved in its own planning. A commitment by the manager to its own fund is also expected, so that its interests are aligned with those of the investors. Assessment is difficult for investors, because reliable results only exist once vintages are completed and interim figures rest on the manager's own valuations.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.