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How does private equity work?

Understanding private equity and private markets means more than simply understanding the structure of a fund. It means understanding what happens at each point in a fund’s life, why, and what that means for investors and the fund’s managers.

This article begins with a reminder of the structure of a private equity fund and how it operates, followed by a detailed look at the life of a fund from formation to close.

Private equity fund structure

We covered the basic structure of a private equity fund in What is private equity?, but here is a quick refresher of the key parties before going through how they interact.

A private equity fund is a pool of capital used to invest in private companies that fit within a predetermined investment strategy.

The fund is managed by a private equity firm that serves as the ‘General Partner’ of the fund. By contributing capital, investors become ‘Limited Partners’ of the fund. As such, the fund is structured as a ‘Limited Partnership’. 


Why is the Limited Partnership structure used?

Tax benefits. A Limited Partnership is - as the name suggests - treated as a partnership as opposed to a corporation. This means that the only tax responsibility is at the investor level. If it were a corporate entity (such as a ‘C corporation’ in the United States) then the fund would pay tax at both the corporate and the investor (dividend) level.

General Partner control. The primary expertise of a private equity firm lies in managing a fund, so the Limited Partners delegate all control to the General Partner. The only exception comes in the form of Limited Partner Advisory Committees ("LPACs") which the General Partner can call on for advice at their discretion.

Limited Liability. Since the Limited Partners are not involved in managing the fund, their liability for losses is limited. This means that the maximum loss they can suffer is the total value of their own committed capital (though this is extremely rare), while the General Partner takes on all liability. Private equity firms generally shield the individuals within the firm from this liability by structuring themselves as Limited Liability Companies (“LLCs”)

Tried-and-tested. The Limited Partnership structure has been in operation within the private equity industry for many decades now and has proven beneficial for all parties. It’s becoming increasingly popular to structure the funds themselves as an LLC (not just the General Partner) as they offer even greater flexibility, especially from a tax perspective.


As explained above, we have four key parties involved in the life of a fund:

  1. The General Partner - a private equity firm
  2. The Limited Partnership - the private equity fund
  3. Limited Partners - investors in the private equity fund
  4. Companies - the recipients of investment from the fund

The timeline of a private equity fund

The technical life of a fund is called the Fund Term. Unlike public equity funds - which usually operate on a rolling basis - the Fund Term is finite. The most common term is ten years, with optional extensions (usually two or three years).

A fund’s life is generally viewed in three components, as defined below:

  • Formation – The period prior to launch of a fund, during which the partnership is created, the strategy determined, offering documents are created, and initial target companies are identified.
  • Investment – The period during which the fund makes investments in target companies, issues capital calls to investors, and works with the target companies to maximise the potential return to investors.
  • Harvesting –The period during which the manager arranges exits from target companies and makes distributions of capital back to investors.

Note: This timeline is just for illustration. Each fund has a different schedule (particularly when it comes to the investment period and number of extensions), the details of which are laid out in the Offering Materials in formation period. Also, the investment and harvesting periods are not clearly defined: they overlap heavily. For example, an investment made early on may begin providing cash flows to the fund before later deals have even closed. Finally, the fund term can be extended beyond the term laid out in the formation materials.

Please note: For Moonfare investors, the process of becoming a Limited Partner is simplified and automated through the Moonfare platform. Click here to learn more about how private equity investing works with Moonfare.

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Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see


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