Private Equity Fund Set Up and Governance

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.