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
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.
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.