Private equity investing has always been the realm of the seasoned investor, with the major players being institutional investors. However, more recently there have been increased access points for an expanded base of investors to get into private equity. The main idea behind private equity investing is putting money, or capital, into portfolios of private companies. When investors buy ownership in a company though private equity, they are purchasing privately owned shares of the company that are not available to the public. Because the details of private equity are typically not discussed in the financial news media, the terms used by industry insiders are oftentimes not known by the public. Here are five private equity terms that cover the basics.
General partners in a private equity investment fund are the managers of the investments within the fund. Usually these partners are also investors with their own money in the fund. For their responsibilities to the fund, they earn an annual management fee typically around 2% of the capital committed to the fund.
Limited partners are typically institutional investors, such as endowments or pension plans, or they could be family investment offices. These investors are looking for the capital gains that can be delivered by investing with a private equity fund. These partners contribute to the pool of money invested by the private equity fund, but do not have a part in managing the fund. Because of their legal setup within the fund, they are safe from losses beyond their committed investment.
Limited partners make a certain financial commitment to a private equity fund, and that money is called committed capital. In most cases this money is invested over a predetermined timeframe, as the private equity firm finds opportunities. A capital call is sent to limited partners when a new investment has been identified. A specific amount of the limited partners’ committed capital is then used to fund that investment.
The cumulative distribution is the sum total of money that has been returned to the limited partner after investments have been made. A private equity investor will review a fund’s cumulative distribution when doing due diligence on the private equity firm.
When a potential investor is evaluating a private equity firm, one way to the investor will look at a private equity fund’s performance is through investment multiples. These investment multiples use various sources of firm and fund data, such as capital contributed and capital distributed, to determine useful statistics. Two important investment multiples in the private equity world are total value to paid-in capital (TVPI)and distributions to paid-in capital(DPI).