This has changed over the years It is argued by advocates of private equity

This has changed over the years it is argued by

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This has changed over the years. It is argued by advocates of private equity that this trend has gradually contributed to and evolved effective management techniques in its investments. In section 3 we explain the basics of deal structuring and provide an illustration in section 4. Private equity uses debt to amplify investment returns (see below). Fund managers therefore need to be skilled in creating financial packages that generate the required blend of incentives without creating excessive risk. 4. Actively manage investments Private equity fund managers have become hands-on managers of their investments. While they do not generally exercise day-to-day control, they are actively involved in setting and monitoring the implementation of strategy. This is the basis of the argument that private equity has become an alternative model of corporate governance. 5. Realise returns Fund managers realise returns primarily through capital gains by selling or floating those investments, but also from income and dividend recapitalisations, which we examine in section 3. The industry generally now talks of a four- to six-year exit horizon, meaning that the investment will be made with the explicit assumption that it will be sold or floated within that timeframe. This exit horizon is the source of the criticism that private equity is a short-term investment strategy. 1.1.6 What risks do investors in private equity funds take? In any equity investment, whether public or private, there is the risk of losing the capital invested. In private equity, investments are long-term, irrevocable commitments to fund unknown, future investment opportunities. An investor commits to these risks and delegates the investment decision to the fund manager. (See section 2.) 1.1.7 What risks do private equity fund managers take themselves? To align the interests of investors and fund managers, the fund managers typically invest alongside the investors, on the same terms, in any fund. The fund manager is therefore both an investor, on the same terms as other investors, and the fund manager. If a fund loses money, the fund managers will make the same loss on their investment offset by any income guaranteed from fees not spent on the costs of the fund.
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18 Private Equity Demystified: an explanatory guide 1.1.8 What rewards do private equity investors earn? The fund manager has four sources of reward. 1. They may receive a return as an investor in the fund in the same way as any other investor in the fund. 2. They receive a salary from the fund management company at a normal market rate. 3. They may receive a share in the profits of the fund management company. 4. They may receive something called ‘carried interest’ which is triggered once a minimum threshold return is achieved.
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  • Fall '18
  • Private Equity Demystified

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