The process of forming a private equity fund can take from a few years to more than a decade. The length of time depends on the experience level of the fund and a number of other factors. For example, a seasoned private equity firm typically has a rolling process in which plans for the next fund are already in development early in the life of the last fund.
The adviser’s conflict of interest should be fully disclosed to investors. The SEC has brought several enforcement actions against advisers for failing to disclose such conflicts. These conflicts can result from advisers’ relationships with portfolio companies or affiliates. Therefore, it is important to understand these conflicts before investing. If there are conflicts of interest, investors should be wary.
A private equity fund has a dual mandate: to add value to the company and exit at a profit within the life of the fund. The GP plays a critical role in planning this exit. An effective exit strategy can result in significant realized value. However, private equity funds often face a number of challenges. One of the biggest is determining the value of their portfolio investments. The valuation of private equity portfolio investments is difficult because there is no readily available market value. As such, private equity firms must use judgment to determine the value of a company.
Private equity firms often focus on operational transformation as a means of creating value. Larger firms generally have value creation teams that implement a range of initiatives, including new product development, expansion into new markets, and cost reduction. These initiatives improve top-line growth by reducing costs and increasing efficiency. They also improve margins by divesting non-core assets.