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What Is Private Capital?

In this article

Now you know more about the world of alternative investments, we're going to delve into one of the sectors called 'Private Capital'. We will look into what private capital is, how it is structured, and why investors choose to allocate funds to the sector.

The Definition of Private Capital

Private capital is the umbrella term for investment, typically through funds, in assets not available on public markets. 

Preqin defines private capital as private investments encompassing the following asset classes: private equity, venture capital, private debt, real estate, infrastructure, and natural resources.

Interests in these assets or groups of assets are typically arranged as limited partnerships with investors referred to as LPs. General Partners, or GPs, act as the investment manager, calling and deploying capital from the LPs.

Click through the images below to read definitions of each asset class.

The various asset classes that now comprise private capital originally emerged as an offshoot of private equity. While private equity as an asset class has a relatively long history (discussed in detail in Lesson 4), the industry only became mainstream in the past three decades, after a boom in leveraged buyouts in the 1980s. As private equity investments became more prevalent, new categories of private investment also emerged, with a growing number of private equity funds targeting opportunities in real estate, infrastructure, and – most notably since the Global Financial Crisis (GFC) in 2008 – debt. Over time these categories of investment have institutionalized to become independent asset classes in their own right.

As discussed in Lesson 1: What Are Alternative Assets? compared to public markets, private capital fund managers typically take a more active role in the management of the companies and assets in which they invest. They will often contribute to business strategy and can play a part in directly managing assets. The nature, size, and structure of investments in private capital can vary significantly, but generally funds are seeking to create value or support growth of the companies and assets in which they invest. The intention is to secure strong returns on behalf of their investors over a pre-determined lifetime.

Private Capital Fund Structures

There are various routes to market available for investments in private capital. As in public markets, investors can access private capital asset classes through listed funds available from an exchange, but the most common route is through private unlisted funds. Alternatively, they can invest directly in an asset class. See a brief overview of the fund structures in the drop-down menu below. We cover each structure in more depth throughout the 'What is Private Capital?' section.

Commingled funds
A commingled fund is when capital from multiple investors is pooled to form a fund that is invested in aggregate.
Fund of Funds
A fund of funds is a two-tier commingled fund structure, in which capital from multiple investors is pooled together to form a fund that invests in other private capital funds, as opposed to making direct investments.
Separately Managed Accounts
A separately managed account is when capital from one investor is managed by one fund manager.

Commingled Funds

In this section, we are going to explore the most common fund structure: the 'commingled fund.'

In a commingled fund structure, fund managers raise pools of capital from multiple external investors to form a fund. Fund managers use this pooled capital to invest in companies or assets.

Most private capital funds are structured as closed-end investment vehicles, which have a finite lifespan and typically do not allow redemptions or the entry of additional investors after the initial fundraising period. These vehicles are organized as a limited partnership, with two key parties:

  • The fund manager, or general partner (GP), whose role is to raise capital from investors, and to source, execute, and manage investments in order to realize returns for the investors in a fund.
  • The investor, or limited partner (LP), which commits capital to the fund, but has no influence over investment decisions. Types of investor typically include institutions such as pension funds, endowment plans, foundations, and insurance companies, as well as high-net-worth individuals.

The terms of the partnership will be documented in a limited partnership agreement, which outlines the details of investments to be made, any specific requirements from the investor (for example restrictions on the scale or geography of investments), the duration of the fund, and the fees to be awarded to the fund manager. The partnership generally has a 10-year life span, during which investors will not be able to redeem their capital. There are five core stages in the life cycle of the fund:

The diagram below is a simplification of the flow of capital between LPs, GPs, funds, and investments.

We cover fund terms in more detail in Private Capital Fund Terms, though generally speaking an investor is required to pay the GP a management fee of 2% of total capital committed to the fund. Once a fund manager has exited the fund’s investments they will also charge a performance fee of 20% of profits generated, and the remaining 80% of profits are returned to the investors.
In this lesson, we introduced you to the definition of ‘private capital.’ Now you know the asset classes included in this sector, all of which emerged as offshoots of private equity after funds began targeting different types of investment opportunities. We also explored the fund structures seen within private capital, and took a deep-dive into the most common structure: the ‘commingled fund.’