KKR etc developed PE model 40 years ago
Innovated management ownership programs to align incentives of management
PE = asset class attempting to beat market via private investments with avg holding period of 7 years funded by HNWIs or institutional capital
Often thought of as buying assets with steady cash flows with lots of leverage and riding out to a big exit
PE funds invest long term capital in private cos for equity that isn’t freely tradable on a public market
(Includes take-privates and private investment in public equity that comes w specific governance rights)
Fund = standalone investment vehicle managed by PE firm on behalf of investors
Most PE funds set up as “closed-end limited partnerships” (finite lifespan and LPs commit for whole term) and “blind pool” (LPs have no say in choice of investments beyond broad mandate)
Firms have two legal entities: GP and investment manager
GPs typically invest alongside LPs but usually 1-5% and not more than 10%
Funds = 10 year term plus two 1-year extensions
Amt raised = fund’s “committed capital”
First close year = year of vintage
Investment period vs. holding period defined in governing documents
Firms must keep raising successor funds to be able to capitalize on opportunities
Typically once 75% of current fund deployed - or whatever LPA says
PE J-curve = LP’s cumulative net cash flow position in a single fund over time including fees
AKA capital invested plus fees minus returns from GP