The Rise of Alternative Private Equity Fund Structures

Private equity is one of the fastest growing investment classes today. Private equity firms operate by acquiring businesses and increasing those business’ cash flows. If the private equity firm can increase a business’ cash flows enough, it can sell the business for a higher price and turn a profit. According to McKinsey & Co, private equity’s net asset value has increased by more than seven times in the last 17 years, which is twice as fast as in the public sector. Private equity is growing so quickly because private equity’s success is dependent on operational knowledge, rather than financial engineering. Essentially, growing and then selling a business is typically easier and more lucrative than investing in the stock market.

With private equity’s popularity, we have seen alternative fund structures emerge. GTE is a search fund accelerator, which is an example of an alternative private equity fund structure. A search fund consists of a searcher, usually an MBA graduate, who looks for a business to acquire and then run as CEO. Search fund accelerators allow searchers to work together and share resources such as investments and leads. Like in traditional private equity, the new CEO will try to increase the business’ cash flows, so they can sell the business for a higher price and turn a profit. Unlike traditional private equity, search funds typically acquire one business, rather than own a portfolio of companies, and keep the original CEO’s company vision alive.

Another example of an alternative fund structure is the private equity secondary market, or secondaries. This market is based entirely around trading investor commitments in private equity. This market ultimately makes investing in private equity more liquid, or less of a long-term investment. Secondaries make private equity more accessible for everyone, as someone can sell their private equity investments if they need to raise capital or avoid future commitments to the fund. Buying secondaries is also advantageous for investors, as the prices are relatively low, and the investment has a short duration. These alternative fund structures make private equity more accessible for all, and with increased accessibility, the private equity industry will continue to grow. 

For more information on private equity fund structures, read the following article from Forbes:

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