Stupid Student Question - How Does LP Liquidity Work?
Freshman here becoming a little bit more immersed in the buy-side and I couldn't find a clear answer to this online - maybe I'm looking in the wrong place.
How does LP liquidity work in private equity firms? If the PE firm hasn't exited a position, the vast majority of money is tied up, no? Can investors not really pull money unless a positions been exited? I have 0 clue how this works, appreciate any colour that could be given on this.
The fund works like taps drawing water. The lps commit capital, say 100m collectively, which is a legal agreement but cash doesn't change hands. On the way in, the gp turns the taps on for each deal to draw down capital (a "capital call"). This happens in the first few years of the fund life.
Then, as positions are exited or perhaps some extraordinary recap and dividend (unlikely), funds are pushed back up the pipes and distributed to the lps by deal/event. As you say, the lp only gets liquidity from events like this.
Finally, an lp in need of liquidity can sell their lp stake. This is the secondaries market. Per most agreements, they need to get permission from the gp to do this, which is normally provided. Lp liquidity is a common driver of the secondaries market where another investor buys lp stakes at 90c on the dollar etc
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