What is a private investment fund?
A private equity fund is an investment company that does not solicit capital from private investors or the general public. Members of a private investment company generally have in-depth knowledge of the industry as well as investments elsewhere. To be classified as a private fund, a fund must meet one of the exemptions described in the Investment Company Act of 1940. Exemptions 3C1 or 3C7 of the Act are frequently used to establish a fund as an investment fund private. Maintaining the status of a private investment fund has an advantage, since the regulatory and legal requirements are much lower than those required for exchange-traded funds.
Key points to remember
- Private investment funds are those that do not solicit public investment.
- Private funds are classified as such under the exemptions provided for in the Investment Companies Act of 1940.
- Hedge funds and private equity funds are two of the most common types of private equity funds.
Understanding a private investment fund
Private funds should meet certain criteria to maintain their status. Generally, the requirements limit both the number and the type of investors who may hold shares in the fund. In the United States, under the aforementioned Investment Company Act of 1940, a 3C1 fund can have up to 100 accredited investors, and a 3C7 fund can have a soft limit of around 2,000 qualified investors. The definition of qualified and accredited investor is accompanied by individual wealth tests. Accredited investors must have more than $ 1 million in net worth, not counting their principal residence and / or $ 200,000 in annual income for an individual and $ 300,000 for a couple. Qualified investors must hold assets over $ 5 million.
Why funds remain private
A private equity fund may choose to stay private for a number of reasons. As mentioned, the regulations for private equity funds are much more flexible than those for public funds. Private equity funds have more freedom in how they manage everything from reporting to redemptions. This allows private investment funds to examine illiquid investments that a public fund would avoid due to the difficulties of regular valuation and liquidation in the event of increasing redemptions. Many hedge funds are private equity funds, so they may continue to use aggressive trading strategies that the manager of a public fund would avoid because of the risk of investor-driven lawsuits. unreasonable. Most importantly, there is no public reporting on the positions of private equity funds, which allows them to avoid getting their hands on the market and eroding the profitability of a stealthily constructed position.
In addition to the flexibility of investment, private investment funds can be the vehicles of choice for managing an important family heritage. Extremely wealthy families can create private investment funds to invest wealth with family members as shareholders. Often a business serves as the initial structure for this arrangement, and it is reused to create a branch of capital investment from the profits of the business. In this case, the family does not want or need external capital, so there is no incentive to make the fund public.