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PRIVATE EQUITY FUND: Features and Structures

Updated: Jun 28, 2020


An investment fund is any entity that pools together money from various persons to invest in securities, other financial assets and real estate. Investment funds are regulated by the Securities Act of 1933, the Investment Company Act of 1940 (the “Act”), the Investment Advisers Act of 1940, the Securities Exchange Act of 1934, the Employee Retirement Income Security Act (ERISA) and state laws. The level of governmental regulation depends on whether a fund is public or private. Unlike pubic fund’s investors, private fund’s investors should be “qualified purchasers” or “accredited investors.” A private fund is a fund that has been structured and sold to investors in such a way that (i) the fund is not required to register as an investment company under the Act and (ii) the offering of interests in the fund is exempt from registration under the Securities Act of 1933 pursuant to a private placement exemption[1]. If a fund holds itself out to the public as an investment company, or holds 40% of its assets in investment securities, such must either register under the Act, hence, be subject to stricter regulatory requirements, or satisfy one of the exemptions. For example, a private equity (“PE”) fund with no more than 100 investors and a PE fund whose investors each have a substantial amount of investment assets are not considered investment companies[2].

The term private fund generally includes hedge funds and PE funds. PE funds, which usually invest in illiquid securities pursuant to long-term investment strategies, include, among others, venture capital funds[3], growth equity funds[4], buyout funds[5], funds of funds[6], and distressed funds[7]. Additionally, funds may be formed to invest in specific geographic regions (such as the US, Asia, Europe or Latin America) or in specific industry sectors (such as technology, real estate, energy, health care or manufacturing).

Below is a discussion of common features and structures of PE funds.


PE funds have the following common characteristics:

· Investment manager sources, acquires, manages and divests the fund’s investments according to a certain investment strategy in exchange for a management fee and a profit participation on the fund’s investments, known as a carry interest;

· Investors make capital commitments to invest a set amount of capital, known as a capital contribution, over time in exchange for a rate of return on investment;

· Fund has its initial closing upon reaching a desired level of capital commitments and additional closings during its admission period (usually of up to 12-18 months after initial closing);

· Fund’s investment period, known as commitment period, is 5-6 years, during which the fund may make new investments;

· Investors cannot withdraw from the fund during the term of the fund (usually 10-13 years, subject to extensions); and

· Investors typically receive distributions from the fund as it disposes its investments or receives distributions-in-kind of securities.


The structure of a PE fund generally involves several entities, as follows:

· The fund itself, which can be formed either as a limited partnership (“LP”) or a limited liability company (“LLC”);

· A general partner (“GP”) or manager, which is typically formed as an LLC and is appointed to manage the fund; and

· An investment adviser, which is typically affiliated with the GP or manager and is appointed to provide investment advisory services to the fund. An investment adviser evaluates potential investment opportunities and incurs the expenses associated with day-to-day operations and administration of the fund in exchange for a management fee. Smaller funds sometimes have one legal entity (usually, LLC) to serve as a GP or manager and an investment adviser.

Master Series PE Fund Structure

Another popular structure of a PE fund, especially a venture capital fund, is a master series LP or LLC. Master series is formed like a regular LP or LLC, except that its certificate of LP or formation must specifically state that it is authorized to form series. While investors become partners or members of the master LP or LLC, each series acts as a separate entity for liability protection purposes. Also, a new series can be formed to make certain investments and only partners or members of such series would participate in such investments made by that series. Since series are treated as separate entities, master series structure allows to separate investments and liabilities without separate public filings, hence, filing fees.

[1] Nora M. Jordan et al., Advising Private Funds: A Comprehensive Guide to Representing Hedge Funds, Private Equity Funds and Their Advisers, 2018-2019 Edition (Issued October 2018), at 520.

[2] https://www.sec.gov/fast-answers/answersmfinvcohtm.html

[3] Invest in early and development stage companies.

[4] Invest in later-stage and pre-IPO companies.

[5] Acquire controlling interest in companies with an eye toward selling or taking public those companies.

[6] Invest in other private funds.

[7] Invest in debt securities or financially distressed companies at a large discount.

This article is not legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Kristina Subbotina. Ms. Subbotina is a New York-based corporate and securities attorney representing startups and investment funds throughout their lifecycle, including business formation, financing rounds, M&A, and day-to-day business operations.

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