PE structure/function

I am looking for information on typical structure/functionality of a private equity firm. My specific questions are:
1) Is the management team usually part of the GP i.e. same company or separate company? If separate, is it a partnership usually?
2) Are there board of directors? Who appoints them and where in the structure do they sit?
3) Who appoints the investment committee and where in the structure do they sit?
4) Is there any other governance council or board?
5) How are roles/responsibilities of GP, investment committee and mgmt. distributed?
6) Is there any benefit of structuring a PE as a private limited company?

Thanks!

 
mrb87:

Given how imprecise your questions are, it would be helpful to know why you are asking. Because I have no idea how to answer these questions -- board of directors of what? Is what a partnership? What do you mean "structuring a PE as a private limited company"?

That said, this is a good representation: http://www.nordiccapital.com/media/37633/fund_structure_nordiccapital.j…

 
Best Response

I'm not trying to be savage at all - people need to understand what the question is before they can answer it.

Maybe this is more helpful:

Let's use an example of a private equity fund and call it KKR Limited Partnership I ("KKR I"). KKR I has one General Partner ("GP") and many Limited Partners ("LP"s). Let's call the GP "KKR GP I Inc." The LPs are the economic beneficiaries of KKR I and own LP units comprising most of the capital of KKR I. KKR GP I Inc. makes a nominal capital contribution to KKR I and owns a special class of shares that allow it to receive carry according to the provisions of KKR I's constating documents. KKR GP I Inc. is responsible for operating KKR I and the LPs are silent partners who cannot participate in the running of KKR I in any way.

There are all sorts of tax and flexibility reasons that this structure is popular, but the upshot is that the LPs have no liability and their capital-at-risk is limited, while the GP carries unlimited liability.

KKR GP I Inc. then enters into an advisory agreement with the management company -- in this case, KKR Inc. -- under which the management company is actually made responsible for selecting/making/managing investments as the Investment Advisor. The management company is where all the private equity investment professionals actually work. So as far as an "investment committee" goes, this would be at the management company level. In return for acting as the investment advisor to KKR I, KKR Inc. gets a management fee, usually expressed as a percentage of capital committed to KKR I -- what you know as the 2% in "2-and-20".

The GP is usually owned by another company (let's call it "KKR Holdings I Inc."), which in turn is owned the principals of the management company or the management company itself. The point of all these GP ownership entities is to insulate the management company/principals from as much legal and economic risk as possible. If KKR I does well enough that there is carry available to pay out, that amount is paid to the GP., KKR GP I Inc.

Note that any entity which is a corporation -- KKR GP I Inc., KKR Holdings I Inc., KKR Inc. -- requires directors. The Limited Partnership does not have directors but will usually have something called an "advisory panel" (or similar) whose function is to try and mediate any disputes that arise within the context of the limited partnership and the limited partnership agreement (e.g. disputes with investors, changes to the LPA, waivers of concentration limits. etc...). The advisory panel, as an ostensibly independent body, should comprise representatives of the management company, investors, and outside members.

 

Thank you, clarifies a lot and very useful! 1) To clarify as I understand the Mgmt company once appointed will have the power to invest without any permission from GP/LP. 2) The Advisory panel would be the governing body but would be looking at policy level decisions. 3) The mgmt. company gets the management fee and the GP gets the carry? I though mgmt. would also get carry

 
johnsmith123456:

Thank you, clarifies a lot and very useful!
1) To clarify as I understand the Mgmt company once appointed will have the power to invest without any permission from GP/LP.
2) The Advisory panel would be the governing body but would be looking at policy level decisions.
3) The mgmt. company gets the management fee and the GP gets the carry? I though mgmt. would also get carry

No, the fee streams are usually split for tax purposes. At least that is my experience. Ultimately they end up in the same place, though.

 

Mrb87 described the typical legal org chart of how a PE firm is structured and they're structured this way for reasons he outlined. The people working at a PE firm sit in the mgmt company entity and principally own and manage the GP entity from an arms length distance. The mgmt company thereby is effectively the GP making the investment decisions and receive the mgmt fee and any carry above a pre-determined annually compounding preferred hurdle rate (usually 8pct) on the LP's money. The clock on this hurdle rate starts ticking when capital is called for an individual investment. The advisory panel is probably akin to what you'd think of as a BoD but likely with more limited scope than a traditional BoD.

 

Thank you mrb87 and MidtownParkAve. Just following on the legal structure, if any of you could please explain: 1) Legal structure if the PE is structured as a Trust - as compared to the Limited Partnership structure, would the Trustee be the GP/Fund Mgm Company and the trust itself the LP? 2) Pros and Cons of structuring as a Limited Parternship vs a Trust?

Thanks!

 
johnsmith123456:

Thank you mrb87 and MidtownParkAve.
Just following on the legal structure, if any of you could please explain:
1) Legal structure if the PE is structured as a Trust - as compared to the Limited Partnership structure, would the Trustee be the GP/Fund Mgm Company and the trust itself the LP?
2) Pros and Cons of structuring as a Limited Parternship vs a Trust?

Thanks!

To go back to my first point, why are you asking all these questions? Much easier for people to answer you if they know the context.

 

mrb87 the end goal is to launch an infrastructure fund - with part govt part pvt/dfi investments. But right now want to present something to our investors before hiring any external professionals - mainly focusing on what options there are to structure it.

 

Slow down there dude, you need to do quite a bit more homework before pitching investors if you don't understand the fund/mgmt co./GP structure. You need to take tax implications into account as well which the very thorough explanation above didn't address.

 
throwing feces:

Slow down there dude, you need to do quite a bit more homework before pitching investors if you don't understand the fund/mgmt co./GP structure. You need to take tax implications into account as well which the very thorough explanation above didn't address.

Yeah, I mean, I was just giving a general overview. If that is actually OP's goal then OP needs to speak with legal/accounting/tax professionals. It's laughable that he'd present something to investors based on an online message board.

 

Am I correct in assuming the following structure: (1) General Partner with it's Board of Directors (who will ultimately be responsible for investing). (2) a Fund Management Company (appointed by the GP or the GP itself) with an Investment Committee and Management team (which would recommend investments to the GP's board of directors) (3) Limited Partners with a Limited Partners Advisory Committee (which could advise on investments).

Please let me know if something is incorrect.

 
johnsmith123456:

Am I correct in assuming the following structure:
(1) General Partner with it's Board of Directors (who will ultimately be responsible for investing).
(2) a Fund Management Company (appointed by the GP or the GP itself) with an Investment Committee and Management team (which would recommend investments to the GP's board of directors)
(3) Limited Partners with a Limited Partners Advisory Committee (which could advise on investments).

Please let me know if something is incorrect.

No

 
johnsmith123456:

I thought I did get it. Pls let me know where I'm wrong. I have a few years of PE experience but on the distressed loan acquisitions side not on the fund level

You literally got it all wrong. The GP is not responsible for investing, the Investment Advisor/Mgmt Co does not merely recommend, and the Advisory Panel is not an "LP" panel and does not "advise on investments."

 

well to backup what i was saying, please see this

https://www.eqt.se/About-EQT/Funds-Structure/ and http://www.nordiccapital.com/organisation/general-partner-and-fund-admi…

it clearly states "The Board of Directors of the fund’s General Partner makes investment and divestment decisions, based on recommendations from the Investment Advisory Committee and advice from the investment advisor."

As far as LP Advisory Committe is concerned please see: http://www.agg.com/An-Overview-of-Limited-Partner-Advisory-Committees-a…

 

Some pretty solid advice in this thread, despite the disagreement. Not all funds are set up the same exact way, although my experience is pretty much identical to mrb87's hypothetical.

Also -- the primary purpose of the LP Advisory Board is to make sure the PE Firm is behaving properly. This includes things such as approving quarterly mark-to-market of the investments. Also, if the PE Firm wants to do something that is outside of the bounds of the Limited Partnership Agreement ("LPA"), the LP Advisory Board determines whether to grant that right. For example: If the LPA says no more than 20% of the fund can be invested in a single portfolio company, the PE Firm can ask the advisory board for an exception if the situation arises.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

Generally speaking, the smaller the shop the broader your responsibilities will be. Chances are you will need to look at funds that are sub $1B AUM and that look at smaller companies and have leaner teams.

Keep in mind, that as a junior person, your primary role will be the execution of the due diligence and modeling aspect up until you close the deal, then you may be more focused on the financial aspects of the portfolio monitoring, post-close.

I'm sure it will vary by culture, etc. but from what I've seen and heard from peers in PE, the smaller shops will provide more exposure to all three of the points you listed.

Regards

"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so." - Ronald Reagan
 
cphbravo96:
Generally speaking, the smaller the shop the broader your responsibilities will be. Chances are you will need to look at funds that are sub $1B AUM and that look at smaller companies and have leaner teams.

Keep in mind, that as a junior person, your primary role will be the execution of the due diligence and modeling aspect up until you close the deal, then you may be more focused on the financial aspects of the portfolio monitoring, post-close.

I'm sure it will vary by culture, etc. but from what I've seen and heard from peers in PE, the smaller shops will provide more exposure to all three of the points you listed.

Regards

okay thanks! my goal is to basically run or be a partner at one of these smaller MM firms as i'd have more autonomy, more pay (assuming the firm does well) and ultimately work for myself (to the extent that i can work for myself when you are dealing with other investors money)

so would it makes sense to go to a shop with like $500m-$1b AUM to learn the entire process hands on? or to do a better name PE firm even tho il be more research/execution/due diligence just for the name/pedigree sake for if i want to raise funds in the future (i know a lot of wealthy people in LA and this isnt far off for me to try to do by early 30s thats why im curious)

I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought- GG
 

Most likely, a candidate with 3-4 years out of MBA will 1) not fit in anywhere since most PE shops will require some sort of PE experience from pre-MBA, or 2) potentially an associate/senior associate on the portfolio management side (vs origination).

Usually the Partner(s) sit at the top. Then, MD, Principal, VP, Associate, Analyst. Obviously, titles vary from firm.

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