What is Private Equity?

There are different types of funds, and each one is unique in its definition as per the fund strategies.

Private equity investment is a huge market in Australia as private equity investment companies turn over an estimated $63.5 billion in a year.

But what is a private equity fund?

Let’s start with understanding private equity first.

What is Private Equity?

Private equity is a form of financing where a capital amount is invested into a company.

Typically, private equity investments are made in developed and mature businesses in traditional industries in exchange for equity or ownership stake. 

Private equity is an alternate asset class and a major subgroup of a more prominent chapter of the financial landscape known as the private markets.

What is a Private Equity Fund?

A private equity fund is a pool of cash that provides equity capital to invest in private companies (that are not publicly listed). The majority of investors in a PE fund are institutional or wholesale investors.

The primary focus of private equity funds is on buyouts. The fund buys entire companies (or major ownership shares) intending to sell the company in the future for a profit.

However, it’s not only money that goes into buying a company. The investors provide technical know-how, strategic direction, and leadership vision to allow the company to flourish and flow for a few years. 

Private equity firms improve their performance by changing operational practices, introducing new management, and injecting fresh capital that allows the purchased firm to make profitable and strategic investments.

Once in good shape and with a higher enterprise value, the fund then sells the company after a few years (3-6 usually) at a higher price, making a return for the investors.

The company can be sold through an initial public offering (IPO) or a sale of trade.

What Companies do PE funds invest in?

The companies that a private equity fund buys vary widely in size. Typically, these companies are relatively mature, making little profit, and have growth opportunities.

Private equity funds are in the hunt for deals that have the potential to at least double their investment over a period of 3 to 6 years. Interestingly, most private equity funds have a high success rate because they invest in a proven business.

As a result, there is less risk involved and a solid chance of getting remarkable returns.

How to start a Private Equity Fund?

It is a fact that all types of funds in Australia are set up as unit trusts or a series of stapled unit trusts. 

The funds are referred to as “Managed Investment Schemes,” defined broadly under Section 9 of the Corporations Act 2001.

However, the process of starting a private equity fund generally follows some phases, which are:

• 1st Phase – preparation of an initial term sheet that features key terms of the proposed investment and that will be used for discussions with potential equity partners;

• 2nd Phase – establish the fund by drafting the governing document (i.e., a trust deed for unit trusts and a limited partnership agreement for limited partnerships); and

• 3rd Phase – investor engagement, which includes preparing confidentiality deeds, negotiating the terms of the relevant fund documents, and preparing subscription deeds and side letters for investors to invest in the fund.

Registration Requirement

In addition to the above phases, the manager of the fund needs to register the managed investment scheme with the Australian Securities and Investments Commission in case:

• it has more than 20 members;

• it was promoted by a person (or an associate of a person) who was in the business of promoting managed investment schemes when this scheme was promoted; or
• ASIC determines that the scheme is related to other managed schemes, and the total number of members exceeds 20.

The fund manager would need to hold an ASF license to run a registered private equity fund. The license holder (fund manager) will also be required to have its accounts audited and lodged with ASIC.

However, the fund doesn’t need to be registered if the terms of the scheme do not require the fund manager to give a regulated disclosure document, i.e., PDS (product disclosure statement), to the investors. This is defined in Chapter 7 of the Corporations Act.

ASIC has the authority to exempt a person from the requirements to register a scheme, hold an AFS license, or provide a PDS to retail clients under the Corporations Act.

How to Launch your Private Equity Fund?

The information available on the internet or amateur fund experts will tell you to obtain an ASF license right after you make up your mind for launching your fund.

That is one costly and misguided first step, and I am here to save you from the loss of your money and, even more importantly, your precious time.

My unique 4-Step Fund Launch Blueprint enables you to start a fund from scratch even before applying for an Australian Financial Services License.

My method will get you involved in the fund formation process by finding the right deal, structuring the deal, and looking for investors before you spend thousands of dollars on legal fees and documentation. 

So, do you want to Create, Launch & Scale an Investment Fund? Book in a FREE session today, and let’s devise the perfect game plan for you!

Here is to your fund success!

Dolly Brtan

Access free training @The Investment Fund Project Facebook group!

DISCLAIMER:  – All written content on this site is for educational and information purposes only. Opinions expressed herein are solely those of the author, unless otherwise specifically cited. All statements reflect the author’s judgment as of the publication date and are subject to change. The information contained herein does not include personalized investment advice, nor should it be construed as investment, legal, or tax advice. All ideas and information provided should be discussed with a professional advisor, certified accountant, or practicing lawyer before implementation. The ideas and information presented here is also not an offer to buy or sell securities nor a solicitation of any offers to buy or sell the securities mentioned herein.