Private Equity

What is Private Equity?

Private equity ("PE") generally refers to an asset class where equity positions are acquired in private companies. In certain instances, publicly traded companies may be acquired and privatised arising from a PE transaction.

PE investments generally require a large capital outlay in the initial years and have long holding periods. This page broadly introduces this asset class, the industry trends and a general discussion on risks associated with private equity.

Private Equity Funds

PE Funds

The majority of PE investments are made through closed-end PE Funds managed by professional PE managers. A fund manager typically raises capital for a PE Fund from investors using a limited partnership structure. The fund manager performs the role of general partner ("GP") and makes key investment and management decisions. Investors are known as limited partners ("LP") and have a limited influence on the Fund's investment decisions.

Astrea III Limited Partnership Structure

The year in which a fund commences its operations or begins to draw capital from its investors is typically referred to as its "vintage" year. Under this structure, the GP directs capital into Investee Companies as investments and usually acquires a majority ownership position in order to exercise meaningful control of the company's board, governance, and operations.

PE Fund Strategies

Generally, PE Funds aim to improve the financial performance of investee companies and help realise their growth potential. They do so by investing in such companies and making operational improvements. Each investment is usually between 3-7 years, after which the fund managers will seek to realise profits on these investments either through a sale or an initial public offering ("IPO").

PE Funds are categorised by the investment strategies they employ, each with varying risk, return, and liquidity profiles. Key investment strategies employed by PE Funds are:


Purchase of controlling stakes in an investee company often resulting in the control over the investee company's assets and operations and involving acquisition leverage


Growth Equity

Investments in profitable but still maturing companies which are seeking capital to expand or enter into new markets

Real Estate

Investments in real estate properties


Venture Capital

Investments in start-up or less mature companies which are expanding


Private Debt

Investments in an array of illiquid credit instruments

Diversified Investments by PE Funds

Individual PE Funds attempt to achieve a certain level of portfolio diversification, and each PE Fund's Limited Partnership Agreement ("LPA") generally contains provisions limiting the concentration of any single portfolio investment within its regional and sector remit. The result is typically a portfolio of ten or more investee companies, made over a multi-year period.

PE Industry Trends

Significant Growth in AUM

The PE industry has enjoyed significant growth over the last 18 years. The industry's assets under management ("AUM") was valued at US$4.5 tn (Fig. 1) as of June 2018, representing an annualised growth rate of 11.4% since December 2000. AUM includes the industry's available capital for investment, or "dry powder", and unrealised value of PE investments. 

Fig. 1: Evolution of PE AUM
Evolution of PE AUM to 30 June 2018

PE Funds AUM

Data as of June 2018 shows that US-focused PE Funds represent the majority of global PE AUM, followed by Europe, Asia, and the remaining Rest of World ("RoW") (Fig. 2). In terms of strategy, Buyout represents the majority of global PE AUM (Fig. 3).  

Fig. 2: PE AUM by Region
Private Equity AUM by Fund Region

Fig. 3: PE AUM by Strategy

Private Equity AUM by Fund Strategy


Strong Fundraising Environment

Beginning in 2013, the PE industry has experienced annual net cash distributions which have supported a strong fundraising environment as investors seek to redeploy capital inflows into new fund commitments. 2018 fundraising activity fell from the peak levels in 2017 but was still higher than the 2008 pre-GFC peak, at approximately US$574 billion (Fig. 4).

Fig. 4: PE Fundraising
Private Equity Fundraising Trends

Increase in PE Deal Activity

In the meantime, PE fund managers have found this environment attractive to monetise their mature investments. Per Figure 5, exit value and number increased by 17% and 1% respectively in 2018 from 2017 to US$373 billion and 2,165 respectively. In 2018, the majority of Buyout exit value was achieved by selling the portfolio companies in trade sales to other market participants and competitors (56%), while the balance was split mainly between sales to other PE Funds (32%), public listings through IPOs (10%), and recapitalisations, restructurings, or sales to management (2%).

Fig. 5: Company Exits from Buyout Funds

Investing in Private Equity Funds

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 2015.

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 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 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$58 bn in 2017.

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


Risks in Private Equity

Key Risk Factors

As with all asset classes, investing in Private Equity involves certain risks. Some of these risks are common to most investments, while others are specific to PE. The European Private Equity and Venture Capital Association has identified the following four categories of key risks an investor in a PE Fund faces:

Funding Risk

The unpredictable timing of cash flows poses funding risks to investors. Capital commitments are contractually binding and defaulting on capital calls results in adverse economic consequences for the LP and the PE Fund.

Liquidity Risk

The illiquidity of LP interests exposes investors to risks when selling such LP interests as there may not be a secondary market for such sale. LP interests are also usually sold at a discount to the reported NAV.

Market Risk

The macro-economic environment and the fluctuation of tangential markets such as public equity, debt, interest rate and currency markets have an impact on the value of the investee companies held by the PE Fund.

Capital Risk

The realisation value of any investee company can be affected by numerous factors, including the quality of the fund manager, equity market exposure, interest rates and foreign exchange movements.

Diversification and Capital Risk Mitigation

PE Fund of Funds

Fund of Funds ("FoFs") are investment vehicles, which make investments in various PE Funds as opposed to making direct investments into underlying companies. PE FoFs can generally be categorised into the following two subsets:

Primary Fund of Funds

Invest in individual PE Funds at their inception through primary capital commitments. Depending on their strategy, a typical Primary FoF may develop a portfolio of between 20 to 50 PE Fund investments over several vintage years. Primary FoFs tend to demonstrate a similar J-Curve to that of an individual PE Fund.

Secondary Fund of Funds

Invest in individual PE Funds by acquiring LP interests through a secondary market purchase. Secondary FoFs provide investors with exposure to a seasoned portfolio that is generally more diversified than Primary FoFs. They also tend to demonstrate a shortened J-Curve compared to that of an individual PE Fund.

Market Evidence of Diversification

Diversification as an effective tool to minimise capital risk can be demonstrated in the capital preservation performance of PE FoFs relative to that of individual PE Funds. Based on a Preqin dataset of approximately 5,000 PE Funds and FoFs with known performance and vintages ranging from 1990-2014, both Primary and Secondary FoFs have demonstrated superior downside protection when compared to investing in a single PE Fund while still generating competitive risk adjusted returns (see Fig. 8). This analysis examines the percentage of PE Funds (by count) which have reported total value to paid-in multiples ("TVPIs"), of less than 1.0x (signaling a capital loss), equal to or greater than 1.0x but less than 1.5x, or equal to or greater 1.5x (a TVPI of greater than 1.0x signals a capital gain).

Fig. 8: TVPI Breakdown by Fund Type

TVPI Breakdown by PE Fund Type


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.