some basic questions about PE

what do multiple funds in a PE firm mean?

Do the funds represent the characteristics of companies they invest in? For example, XIV is for large caps only, XIII for mid caps, XII for small caps, XI for pre-revenue companies (tech companies), II for companies that generate abc EBITDA per year, X for companies in NYC etc.

When PE firms take money from LPs, do the LPs care which funds their money goes into? I would have thought that LPs are like "we want a certain risk exposure to balance our portfolio ..." so it would only make sense for their money to be in certain funds in order to derive such an exposure 

What do the numbers of the fund size represent? Is it like the amount of money it has from day 1 the fund is opened? The total amount of capital invested into the companies at entry?

My understanding is that a fund is 'opened' when the PE firm has finished raising capital so it can now start investing in companies for that fund. When a fund closes is that when it has exited out of all its portco companies in that fund? or when it no longer accepts capital for the fund

sorry for the long-winded questions, appreciate if anyone can provide some color, again many thx

Comments (19)

Most Helpful
  • Associate 1 in PE - LBOs
Dec 7, 2021 - 12:56pm

Good questions. Each fund has its own mandate. Each fund invests for a specific purpose, has its own restrictions, covenants, hurdle rate, return of capital, fees, etc. So in a sense, you are correct. Similarly, you are correct that LPs commit capital for specific funds that have mandates to invest in sectors and out of a fund that they want to gain exposure to. Fund size numbers typically represent the total amount of committed capital to the fund. On day 1, a $500M fund may only have $5M in it, but it has $500M in committed capital from LPs that is called upon when it is needed to make an investment. PE firms also typically have banking relationships with lines of credit they can use to finance and execute transactions in the short term, and then pay down when they receive the capital they call from the capital LPs committed. A fund is open when it is accepting capital commitments from LPs as the GPs are fundraising. A fund is closed when the GPs are no longer accepting capital commitments from LPs for that fund. The GPs can typically invest the capital from the fund that they're raising throughout the fundraising period while it is open and definitely after they've closed the fund (stopped accepting capital commitments for it). So, for example, if I'm raising a $500M fund, that might take a year and a half to close. 6 months in, I may have capital commitments of $200M. As a GP, I might be able to call on the LPs who have committed that $200M of capital thus far to honor their commitment if I need the $ to make an investment before the fund is closed.

  • Associate 1 in PE - LBOs
Dec 7, 2021 - 12:59pm

Add: It wouldn't make sense for LPs to just give large sums of money to GPs that would just sit in a fund, dormant, until the GPs were ready to deploy it. They would rather hold onto it, earn interest or yield or return on it, until the GPs call for it and are ready to deploy the capital that the LP committed to the fund.

  • Intern in IB-M&A
Dec 7, 2021 - 1:13pm

So if a fund is opened for a year and a half (before then closing), and recalling that generally LBO timelines suggest that the length of time between when a PE firms first enters a company then exits the same company is 5 years, does this suggest that funds 'exist' for say 6.5 years? Following on from that, since PE firms could invest in a company on day 1 and invest in another company in year 3 within the same fund, would that mean the same fund 'exists' for max(1.5+5, 1.5+[3+5]) = max(6.5,9.5) = 9.5 years?

Could you also provide some color on what is meant by the flagship fund? Is this just the most prestigious of its funds?

Appreciate the responses.

  • Associate 1 in PE - LBOs
Dec 7, 2021 - 1:22pm

You are correct. If you define the longevity of a fund by the time it takes to return all of the capital originally committed and deployed to LPs, then yes, it could take that long, based on your calculations. As such, a PE firm can often have portfolio companies simultaneously that belong to multiple different funds. If a PE firm raises a new fund every 3-5 years, and it takes 9.5 years to fully deploy and return all of the committed capital, they may have multiple portfolio companies in multiple funds and be investing out of multiple funds. A "flagship" fund is just a term that typically refers to a PE firm's main buy-out fund (also typically their largest fund), where they are executing on their core investing strategy of taking controlling stakes in companies in their focus sectors. A PE firm might also have a healthcare focused fund, for example, or a microcap growth fund that invests smaller amounts of money to take minority and majority stakes in earlier, growth-stage companies. 

  • Associate 1 in RE - Comm
Dec 7, 2021 - 2:59pm

can someone give insight into why funds are oversubscribed. why might this occur and why cant the GPs take as much money as they possibly can?

Dec 7, 2021 - 3:25pm
Lima Papa, what's your opinion? Comment below:

Typically, a large LP (or a few of them) will negotiate the terms of the LPA with the GP and put in a cap on the fund size. This is to ensure that a GP doesn't raise so much capital that it becomes difficult to execute on the strategy that they've told LPs they will pursue. For example, if you were trying to raise $1b but you manage to raise $5b, you're either going to have to do a lot more deals (stretching the bandwidth of your investment team) or you'll invest in companies of larger market cap (going further up-market with your platform investments than you said you would) or you'll make investments with more equity and less debt (potentially reducing returns).

Dec 8, 2021 - 8:39am
Toll Ride, what's your opinion? Comment below:

Additionally, some early LPs put a cap on fund size because they have internal rules that state that they can only consist of a certain minimum/maximum of the total fund

Dec 7, 2021 - 5:47pm
RedWhiteAndBlue, what's your opinion? Comment below:

The roman numeral is the fund in the series within the strategy. So BX 14 is Blackstone's 14th flagship buyout fund for example. Generally, if performance is reasonable, managers will generally raise a larger fund in each subsequent range in that series. While the mandate may shift over time (i.e. lower middle market fund moves into mid market), you generally won't see wholesale changes within a fund's strategy. An exception might be traditional upstream or midstream private equity energy managers who are now becoming renewables-focused managers as we embark on an energy transition.

LPs certainly care which funds or series of funds they have exposure too. Even on a broad platform like carlyle or blackstone, most LPs will only have exposure to a subset of strategies. Painting broad strokes here, but an LP might get their real estate exposure from Blackstone, there private equity exposure from Carlyle and then there credit exposure from Fortress. Then within those funds, they may self select further into specific strategies. For example, we don't love real estate right now and Asian property seems overvalued, so rather than doing BX's global real estate strategy, you might allocate to the Europe or US series of funds.

  • 3
  • Intern in IB-M&A
Dec 7, 2021 - 5:56pm

Are LPs able to selectively choose how it wants to allocate it's commited capital based on certain strategies within a fund? That is to say, if there is one real estate fund, are you saying an LP could choose to allocate towards RE MENA as opposed to RE EU? Is there any difference from having one real estate fund I (with 3 separate strategies e.g. NA/EU/MENA) and 3 separate funds RE funds or is that essentially the same thing 

Dec 8, 2021 - 9:53am
Lima Papa, what's your opinion? Comment below:

No - RedWhiteAndBlue means that Carlyle, for example, will have many different series of funds, each with a different strategy. So for example, there could be Carlyle Europe, Carlyle Asia, Carlyle Middle Market, etc. and the LP can choose to make a commitment to Carlyle Asia VI and get their Asia PE exposure that way. But once you've committed to Carlyle Asia VI (or in your example, real estate), you can't pick and choose what you have exposure to within the fund - you get everything.

Dec 8, 2021 - 2:48pm
JustinTobine, what's your opinion? Comment below:

Don't need to know anything about PE, just know PE = guaranteed 80mm total comp unless youre not at a mf

  • Prospect in IB-M&A
Dec 8, 2021 - 4:43pm

is there material total comp differences among MM, UMM and MF PE funds ?

Dec 8, 2021 - 5:07pm
JustinTobine, what's your opinion? Comment below:

base comp + bonuses likely to be more or less uniform across pe shops unless theyre some shitty tiny one

its carry that increases exponentially with fund size and performance

Dec 8, 2021 - 7:50pm
JohnsonSmith, what's your opinion? Comment below:

There is a really good document on PE fund structuring that explains the GP/LP relationship and how fees flow through the structure. I cant link it as I am "new" but DM me. 

Broadly speaking there are 2 (perhaps 3) fund structures. 

Open ended - Always open for new investments (unless gated)
Closed ended - Raise money across a few months/years and are "closed" to new money. They then have a 5/7 year investment period where funds may be locked up
Evergreen - no fixed lifespan. 

Fund dealing needs to match liquidity of underlying assets. 

L/S HFs are normally daily dealing as all the assets are highly liquid and can be wound down to meet redemption requests. 

PE funds are illiquid. i.e they use LP money to buy another firm. They cant liquidate (cash out) the position until they sell the portfolio company. PE funds will have an investing, and a harvesting period. Investing period is when they deploy the capital and the harvesting period is when the portfolio co's run off / mature or exit before the life of the fund is up (ideally).

When a fund is "closed" typically that means its closed to NEW investment. 

Note that when a PE fund raises capital they dont physically have the cash, they have commitments from LP's and they will make something called a capital call when the money is required. I.e they find a good target perhaps 1 year after the fund closes. They will notify LP's that cash is required in 30/90 days etc. This is to stop cash drag on the fund balance sheet. 

Dec 14, 2021 - 5:40am
princepieman, what's your opinion? Comment below:

Sequi voluptas sit explicabo eos et id necessitatibus ut. Illum quo aut sunt explicabo voluptas accusamus expedita consectetur. Ab adipisci id ut sint debitis vero praesentium. Quidem quos dicta ea quas ratione explicabo qui et.

Possimus molestias explicabo sunt ullam sequi provident. Cumque quis delectus ad voluptatem voluptas dolor. Et maiores explicabo consectetur eos.

Start Discussion

Career Advancement Opportunities

August 2022 Private Equity

  • The Riverside Company 99.4%
  • Apollo Global Management 98.9%
  • Warburg Pincus 98.3%
  • Blackstone Group 97.8%
  • KKR (Kohlberg Kravis Roberts) 97.2%

Overall Employee Satisfaction

August 2022 Private Equity

  • Blackstone Group 99.4%
  • The Riverside Company 98.9%
  • Ardian 98.3%
  • KKR (Kohlberg Kravis Roberts) 97.8%
  • Bain Capital 97.2%

Professional Growth Opportunities

August 2022 Private Equity

  • The Riverside Company 99.4%
  • Bain Capital 98.9%
  • Warburg Pincus 98.3%
  • Apollo Global Management 97.8%
  • Blackstone Group 97.2%

Total Avg Compensation

August 2022 Private Equity

  • Principal (8) $676
  • Director/MD (22) $599
  • Vice President (82) $363
  • 3rd+ Year Associate (82) $276
  • 2nd Year Associate (184) $266
  • 1st Year Associate (353) $226
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (74) $134
  • 1st Year Analyst (218) $122
  • Intern/Summer Associate (25) $68
  • Intern/Summer Analyst (262) $58