If you are investing into a private equity fund it is important to understand the machinations behind what various parties do in regards to your private equity investment. When you contribute money into a private equity fund you are effectively transferring your money over to a private equity fund management who will invest your money in accordance with the stipulations of the agreement you entered. Generally speaking, this agreement is called a private placement memo (PPM), although for private equity funds that are not required to be registered with the SEC (typically due to having less than five hundred partners) may have other agreements under varying names that investors can subscribe to.
A PPM will detail out what types of investments the private equity fund manager is allowed to make and any limitations on their investments. A PPM will also detail any management fees that will be paid to the fund manager in exchange for handling your investments for you. Often, these management fees are calculated as a percentage of the fund assets that they are managing. Since management fees can vary widely from one fund to another an individual who is investing in a private equity fund should read the PPM closely. The amount of management fees being charged are required to be disclosed to investors under federal and many state laws.
A PPM will detail out the risks that are typically associated with these types of investments and will provide some standard disclosures regarding the plans for distributing money to you and any limitations on this investment. The investment strategy will be disclosed in some form, even if there is a trade secret is involved in the running of the fund. Often, these investment strategies disclose the types of industries that the Fund will concentrate on investing in.
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Fund managers are generally called either passive or active fund managers. Passive fund managers trade infrequently while active fund managers are frequent traders similar to the way in which day traders operate. Basically, active fund managers will buy and sell different positions frequently. This additional activity may lead to higher management fees associated with these funds.
Private equity managers can vary considerably in both quality and integrity so it is important to perform your due diligence before investing in a fund. Consider the reputation of the manager amongst his peers as well as their track record in providing returns for investors.