PE Fund Investors

PE Fund investors are typically large institutional investors such as sovereign wealth funds, state pension plans, university endowments, pooled retirement funds, insurance companies, and wealthy individuals.

PE Returns

A key industry metric for measuring a PE Fund's performance is its net internal rate of return ("IRR"); which factors in the irregular cash flows of PE investing. Historically, Buyout and Growth Equity strategies have produced the strongest performance as measured by the median net IRR since inception of funds. Fig. 6 includes PE Funds with vintages 1990 to 2012.

Fig. 6: Median Net IRR Returns by Strategy

Key Fund Terms

PE Funds are generally structured as limited partnerships, and are governed by a legal document known as a limited partnership agreement, or "LPA".

The key terms usually found in LPAs are shown below:


Usually 10-11 years, which can often be extended by a further 2-3 years

Capital Commitment

Agreed amount that a Limited Partner ("LP") is obliged under the LPA to contribute

Commitment Period

Period over which PE Fund commits to make new investments. Usually concludes on the 5th or 6th anniversary of the fund's inception

Typically, a PE Fund would aim to have called around 80-90% of its capital by the end of the Commitment Period

Distribution Waterfall

Allocation and distribution of investment proceeds between LPs and General Partners ("GPs").

May be applied on an individual investment basis ("American" waterfall) or on a pooled investment basis ("European" waterfall)

Management Fees

Fees for the GPs services

Usually range from between 1.0% to 2.5% of the aggregate committed capital of the PE Fund

Carried Interest

Share of any PE Fund's profits that the GP receives, subject to certain performance hurdles

Usually 20% after investment cost has been recouped plus a "preferred return" of usually 8% net IRR to the LPs

Fund Valuation

As opposed to public stocks, which are priced daily in the markets, a PE Fund and its underlying portfolio investments are generally valued on a quarterly basis by the GP. The GP typically determines the fund's NAV in accordance with internationally recognised accounting standards such as US GAAP and IFRS.

The Secondary Market

PE is considered to be an illiquid asset class. It does not have an established public trading market in which investors can sell their interests in the PE Funds, otherwise known as "LP interests". However, as a result of a maturing PE industry, there is better liquidity for secondary LP interests.

LPs might choose to sell their LP interests in the secondary market for many reasons. This includes monetisation of unrealised value, reduction of unfunded obligations, and general portfolio management/restructuring. Sales of LP interests in the secondary market can be conducted through broad auctions or negotiated transactions. The majority of LP interests are sold to dedicated asset managers known as secondary fund of funds which raise investment vehicles for the purpose of acquiring LP interests in the secondary market (although a growing number of sophisticated non-traditional investors are also now participating in the secondary market).

Industry estimates suggest that the secondary market transaction volume reached approximately US$40 bn in 2014.

The J-Curve

As a result of drawdowns to fund new investments, management fees and fund expenses, PE Fund investments tend to exhibit negative net cash flows in their initial years. In the later years as the investee companies mature and are subsequently sold for a profit, the fund starts to record positive net cash flows. The collective cash flow pattern is commonly known as the "J-Curve"  (Fig. 7).

Purchasing LP interests in the secondary market allows an investor to gain exposure to PE Funds at differing stages in the funds' lives. The initial negative net cash flows can potentially be mitigated by investing in mature PE Funds as shown in the shaded area.

Fig. 7 The Private Equity J-Curve
PE J-Curve


The information regarding private equity and the private equity industry has been derived from general information which is publicly available as well as the specific sources cited in the endnotes to this section or were obtained from various external sources, and have not been verified with such sources. The information is included for information purposes only and has not been independently verified by the Issuer and its affiliates and should not be regarded as an indication of the future performance or results of the Fund Investments, or private equity funds or the private equity industry generally. 

The information contained in this section includes historical information about private equity funds and information on the private equity industry generally that should not be regarded as an indication, promise or representation as to the past or future performance or results of private equity funds or the private equity industry generally.