How are private equity firms organized?
Private equity firms establish funds (typically limited partnerships) that raise capital from investors (traditionally large institutional investors—who are referred to as limited partners, or LPs). The LPs provide the capital for a limited period of time and the private equity firm’s managing partners—known as general partners, or GPs—invest their own capital along with the capital raised from investors. With the capital, the general partners contribute equity to companies they believe can achieve significantly greater growth and profitability with the right infusion of talent and capital. Private equity funds typically hold companies for three to seven years, and then attempt to sell them, hoping to realize a gain on the sale as a result of the increased value created during their period of ownership. If the portfolio companies are not successful, then there are no profits and the private equity firms lose their invested capital.
