A private equity fund pools capital from investors to buy stakes in companies that are not listed on a public stock exchange, with the aim of growing or restructuring them and eventually selling at a profit. The structure, fee model and access rules are different enough from a mainstream fund that they are worth understanding before any specific opportunity is evaluated.

How a private equity fund is structured

Most private equity funds are set up as a limited partnership. The fund manager (the "General Partner" or GP) runs the fund and makes investment decisions; investors (the "Limited Partners" or LPs) commit capital but take no part in day-to-day management. Capital is not handed over up front — investors make a commitment, and the GP "calls" capital in stages as deals are found, known as drawdowns or capital calls.

A typical fund has a defined term, commonly around ten years, split roughly into an investment period (the first several years, spent buying companies) and a harvest period (the remaining years, spent growing and then exiting those companies). This is why private equity is illiquid by design: your capital is committed for the life of the fund, with no ready secondary market to exit early — see secondary investments for the main route that does exist.

The "2 and 20" fee model

Most private equity funds charge an annual management fee (commonly around 2% of committed capital) plus carried interest (commonly around 20% of profits above a set return threshold, known as the hurdle rate). Fees vary by manager and fund size — always check the specific fund's actual terms rather than assuming a standard figure applies.

The J-curve: why early returns often look negative

Private equity funds typically show a "J-curve" pattern: reported returns dip in the early years (fees are charged from day one, while portfolio companies have not yet been grown or sold) before rising as exits occur later in the fund's life. This is a structural feature of the model, not necessarily a sign the fund is underperforming, but it does mean early paper losses are normal and long holding periods are the norm, not the exception.

How UK investors actually access private equity

  • Direct fund commitments — investing directly in a limited partnership. This route is generally restricted to institutional, professional or certified high-net-worth/sophisticated investors, with high minimum commitments and full illiquidity for the fund's term.
  • Listed private equity investment trusts — closed-end, FCA-regulated companies traded on the London Stock Exchange that themselves invest in private companies or private equity funds. These are accessible to ordinary retail investors with no certification required, and can be held in an ISA or SIPP — see Private Equity Investment Trusts Explained for the full picture, including the premium/discount-to-NAV dynamic that is unique to this route.
  • Co-investment — investing directly alongside a fund into a specific deal, typically only offered to existing fund investors. See What Is Private Equity Co-Investment?.

Key risks

  • Illiquidity — capital is generally locked in for the fund's full term with no guaranteed early exit.
  • Blind pool risk — when committing to a new fund, the specific companies it will eventually buy are usually not yet known.
  • Valuation uncertainty — unlisted portfolio companies are valued periodically by the manager using accepted methodologies, not priced continuously by a public market, so reported values can lag reality in either direction.
  • Concentration and manager risk — returns depend heavily on the specific GP's skill and access to good deals; performance varies widely between managers.

Before committing capital

See the full Private Equity Investment Due Diligence Checklist for a practical framework. At minimum, check the manager's track record across previous funds, the fund's actual fee and carry terms, its term length and any extension provisions, and (for a direct fund commitment) whether the GP or fund is FCA-authorised where relevant, via the FCA Register, and the GP entity's filings on Companies House.

Private equity investments can lose value, and past fund performance is not a guide to future returns. This is not financial advice; consider speaking to an FCA-authorised adviser before investing.