Private equity fund

A private equity fund (PEF, 사모주식펀드/私募株式基金) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity.

Private equity funds are typically limited partnerships with a fixed term of 10 years (often with annual extensions). At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From investors point of view, funds can be traditional where all the investors invest with equal terms or asymmetric where different investors have different terms.

A private equity fund is raised and managed by investment professionals of a specific private equity firm (the general partner and investment advisor). Typically, a single private equity firm will manage a series of distinct private equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested.

Key words
private equity fund, limited partnership, general partner, investment advisor, LBO financing

Legal structure
Most private equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement (LPA). Such funds have a general partner (GP), which raises capital from cash-rich institutional investors, such as pension plans, universities, insurance companies, foundations, endowments, and high net worth individuals, which invest as limited partners (LPs) in the fund.

Private equity investments and financing
A private equity fund typically makes investments in companies (known as portfolio companies). These portfolio company investments are funded with the capital raised from LPs, and may be partially or substantially financed by debt. Some private equity investment transactions can be highly leveraged with debt financing — hence the acronym LBO for "Leveraged buyout". The cash flow from the portfolio company usually provides the source for the repayment of such debt.

Such LBO financing most often comes from commercial banks, although other financial institutions, such as hedge funds and mezzanine funds, may also provide financing. Since mid-2007, debt financing has become much more difficult to obtain for private equity funds than in previous years.

LBO funds commonly acquire most of the equity interests or assets of the portfolio company through a newly created special purpose acquisition subsidiary controlled by the fund, and sometimes as a consortium of several like-minded funds.

Indigenous PEFs
Korean private equity funds (PEFs) are emerging as the game changers in the merger and acquisition market amid weakening influence of foreign PEFs.
 * MBK Partners, the country’s largest PEF, recently signed a deal to acquire ING Life’s Korean unit for 1.84 trillion won. The firm has bought Woongjin Coway, the country’s top water purifier maker, and NEPA, a major outdoor sportswear firm.
 * KDB PEFs are operated by the Korea Development Bank, the largest government-owned bank in Korea. KDB has increased its equity investments in Korean companies.
 * Mirae Asset, one of the largest asset management companies in Asia, has acquired Coffee Bean & Tealeaf, a Los Angeles-based global coffeehouse chain, through its PEF.
 * Vogo Fund, another major Korean PEF, has bought Burger King’s local chain and Tongyang Life Insurance.

In 2013 alone, Korean PEFs spent 8.6 trillion won buying out firms according to the Financial Supervisory Service (FSS). Local PEFs operated funds totaling 42 trillion won ($39 billion) as of the end of September. That’s 140 times larger than in 2004 when the country’s first PEF was established. They are expected to spend more in the years to come because more firms undergo restructuring and are put up for sale due to an economic slump.