Provided by Leslie Cummins and Peter Tropper of the International Finance Corporation
- Alternative assets: A Private Equity Fund is an alternative asset; that is, it serves as an alternative asset to equities listed on a stock exchange or fixed income instruments such as bonds. Other alternative assets include Real Estate Funds and Hedge Funds, which the GP Toolkit does not address.
- Private Equity vs. Venture Capital: Venture Capital refers to investing in start-up and very early stage companies. Private Equity refers to investing in medium- or larger-sized, established companies. Often, the term ‘private equity’ is used to cover both venture capital and later stage investing.
- Legal Structures: A Fund’s legal structure may be determined by its legal domicile (country where it is registered for tax purposes). Therefore, in some jurisdictions, a Fund may be a Partnership, a Trust, a Limited Liability Company (LLC), or a Corporation. Under the Partnership structure, the Fund Manager is called the General Partner (GP), and the Investor is called a Limited Partner (LP). Under the Trust structure, the Fund Manager is called the Trustee or the Advisor to the Trustee, and the Investor is called the Unitholder or Beneficiary. Under the LLC structure, the Fund Manager may be called either the Manager or the Advisor, and the Investor may be called the Shareholder.
- Fund Investments: A Fund is a pass-through vehicle which makes investments in companies called either Investee Companies (or “investees”) or Portfolio Companies.
- Fund Tenor: A Private Equity Fund is a closed-ended investment vehicle. Therefore, it has a limited life, usually between seven and ten years.
- Performance Measurement: A Private Equity Fund’s performance is usually measured in terms of its Internal Rate of Return (IRR), or the rate of discount which makes the Net Present Value (NPV) equal to zero.
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