A private equity fund typically refers to a general partnership formed by PE firms which are utilized to invest in private companies. The private equity fund may have general investment criteria (meaning it invests in different industries) or have specific industry criteria. However, private equity funds typically have an investment philosophy that it sticks to throughout its term, which tends to be anywhere between 10 and 13 years. After this time period elapses, the private equity fund is closed by having all funds distributed back to the limited partners. Private equity funds may invest directly in equity securities of the target investment, in the form of mezzanine debt or in both equity and debt. In general terms, private equity funds often focus on one of the following investment philosophies: Venture capital — used for financing early stage companies that do not have access to financial markets or conventional financing. Growth capital — used for funding the expansion of an established private company that is "asset light" and therefore may not be able to use its own assets to secure traditional financing for such growth. Leveraged or management buyouts — used in combination with additional leverage placed on a company to allow the existing management to take control of the target. The company's cash flow has to be sufficient to cover the carrying costs of the additional debt. Distressed or turnaround situations — used when companies are unable to service their existing debt, and the fund's equity is used to recapitalize the balance sheet along with management conducting a turnaround strategy. Sellers must ensure they are prepared if they wish to attract an investment from a private equity fund. This is because private equity funds conduct rigorous analysis on the potential future EBITDA, free cash flow generation, and overall balance sheet of the target. The intent is to assess if the selling company can be further improved so that high returns can be achieved when the company is sold and the private investment monetized. Every situation is different. A private equity partner can be a great solution for a business in which the owner is optimistic about the future, but still wants to diversify his/her personal net worth. But going down this road is as complicated, if not more complicated, than an outright sale, and it comes with its own set of risks, too. By knowing your options, you can put together the best possible deal when the time comes.
