Private Equity Fund Set Up and Governance

Private Equity Fund Set Up and Governance

Gavin Ryan

25 years: Private equity & banking

In this video, Gavin explains the basic structure of a private equity firm, before delving into the structure and governance of funds and its fund managers.

In this video, Gavin explains the basic structure of a private equity firm, before delving into the structure and governance of funds and its fund managers.

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Private Equity Fund Set Up and Governance

11 mins 22 secs

Key learning objectives:

  • Outline the structure and governance of funds

  • Outline the governance and economics of fund managers

Overview:

There are between 6,000 and 8,000 private equity firms worldwide. A few are very large firms but most are mid cap firms employing 10 to 20 people. Funds are set up as partnerships, with the main governance bodies being the Investment Committee and the Advisory Board. Fund Managers can be independent or have LPs as shareholders. They are rewarded by an annual management fee and a profit share, known as the “carried interest”. Fund Managers have frequently had a previous profession.

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Summary

What is the structure and governance of funds?

Funds are typically set up legally as a partnership; although in many cases they may also be set up as a limited liability company or some other variation. The factors driving the choice of the partnership structure are tax, limited liability, privacy and flexibility.

The governance of a private equity fund will be driven by the general partner – which is the fund manager; and by the creation of two institutional bodies, the Advisory Board and the Investment Committee. The advisory board is the forum in which the LPs are represented. It provides oversight and has the power to remove the GP. The Investment Committee is the forum in which the investments and divestments are decided, upon the GPs proposal.

What is the governance and economics of Fund Managers?

The GP is typically another corporate entity, such as a limited liability company; and therefore its ownership and governance will be relevant to the success or otherwise of the operation. We can distinguish three basic models of governance of the fund manager. The economics of a private equity operation revolve around the so-called two and twenty split and the distribution waterfall.

Private equity fund manager is very much a second profession, according to which the first part of the fund manager’s career enabled him to develop skills and experience that he can bring to bear on the fund manager role. Fund managers have previously been bankers, company executives, entrepreneurs, lawyers, accountants. There is always a debate in the industry, as to what skills are the best ones to be a fund manager. The debate is usually between those who argue the fund manager needs deal structuring skills and those who argue the fund manager needs operational skills to better understand companies.

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Gavin Ryan

Gavin Ryan

Gavin Ryan has twenty years’ experience as a private equity fund manager. He has managed a $30m Advent International Affiliate Fund, a $200m Fund part of Soros Fund Management and a €2.5bn Green Energy Asset Manager. Before he was in investment banking with HSBC and Nomura. Gavin has an Engineering Degree from Cambridge and an MBA from McGill.

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