The formation of a private equity fund provides a vehicle to use for investments in a geographic region or a specific business sector. Private equity funds are formed by sponsors or investment managers This type of investment will generate profits for the sponsor from fees and returns on investment.
Private equity funds will typically be formed as a Limited Partnership or a Limited Liability Company for tax purposes. There are many benefits to fund investors for these types of private equity funds. The formation of an LP or an LLC is used to pass gains, income, deductions, credits, and losses through to the fund’s partners.
A special purpose vehicle is created by the sponsor of a private equity fund to administer and control a fund. This special purpose vehicle will take actions on behalf of the fund. The specific function and the type of vehicle is based on the form of the initial fund. Private equity funds will have a general partner or an investment manager.
The general partner is given the legal power to make decisions on a fund’s behalf and typically controls funds formed as a limited partnership. The purpose of the general partner is to keep the sponsor insulated from any claims against the fund and from general liability. This type of liability will be focused on the general partner based on state laws for limited partnerships.
Investment managers are typically appointed by the fund’s sponsor and is affiliated in some way with a GP or fund manager. Their purpose is to provide the fund with investment advisory services. This is an entity that enters into an investment agreement with a fund’s manager or general partner. They are paid by the fund through management fees that are used to pay for day-to-day activities of the fund and for hiring any investment professionals. The same investment manager can be used for multiple funds that belong to a single sponsor.
It demonstrates how private equity drives economic growth, strengthens business and provides financial security to millions of Americans.
Management fees are typically paid to a sponsor for managing a private equity fund. The fees are not a set amount and can range from 1.5 percent to 2.5 percent. These fees are paid by investors in a fund on a quarterly or semi-annually. Investors may also be charged an acquisition fee for an investment.
Private equity funds also have various expenses. These include organizing an infrastructure costs, the day-to-day operation of the fund, and payments to an investment manager.
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