Types of Private Equity Investments

There are various ways to make private equity fund investments. An investor that is not itself sourcing and making investments directly into portfolio companies will often invest in primary funds and secondary funds, as well as funds of funds which invest in primary and/or secondary funds. In addition, co investments are often part of the asset mix.

Primary Funds

Primary fund investing refers to investments that are made by an investor in a private equity fund when it is being formed and capital commitments are being solicited. By making a primary fund investment, an investor participates in the fund from its inception and can realize the full benefit of distributions and gains as portfolio investments are made and realized. In addition, investors who make primary fund investments may have an opportunity to negotiate terms and conditions with the promoter of the fund, as the fund is being established.

Secondary Funds

Typically, a private equity fund will not generate meaningful returns until after its capital commitments are called and invested directly in portfolio companies, after which profits may be realized and distributed. Secondary fund investing refers to the purchase of an existing portfolio of private equity fund investments and/or related co investments, after some or all of the capital commitments of the limited partners have already been called and invested. Investing in this manner, after the commitment period, allows for greater risk management given that existing investment portfolios can be evaluated and priced based on established data.

Co Investments

A manager of a private equity fund may determine that there is an investment opportunity which requires capital that exceeds what the particular fund can invest. In such a situation, limited partners may be offered the opportunity to invest in the portfolio company directly, alongside the fund. Typically, the manager of the fund will manage the co investment along with managing the fund’s investment, usually for no management fee or carried interest. The costs and expenses of a co investment are normally shared by each co investor in proportion to the capital each has invested.

Next: Why Fund of Funds Investing →

↑ Main: Investing in Private Equity

Version Française