A written masterclass, roughly nine minutes to read. It explains structure and mechanics; it is not advice and not an offer of any fund. Capital committed to private funds is at significant risk.
The shape of a fund
Almost every private equity fund is the same legal shape: a limited partnership with a fixed life, a manager who decides, and investors who commit and wait.
- General partner (GP)
- The manager. Sources deals, makes decisions, charges the fees, and usually invests its own money alongside yours.
- Limited partners (LPs)
- The investors. Commit capital, have no say in decisions, and are liable only up to their commitment.
- Fund life
- Typically ten years with extension options. The extensions are used more often than the marketing suggests.
- Investment period
- The first four or five years, during which capital is called and deployed.
- Harvest period
- The remainder, during which holdings are sold and proceeds distributed.
GP commitment is the alignment signal
How much of their own money the manager has in the fund tells you more about alignment than any presentation. Ask for the figure, and whether it is cash or a fee waiver.
Where the return actually comes from
Private equity returns decompose into three sources. Knowing which one a manager relies on tells you whether the record is skill or weather.
| Source | What it is | How durable |
|---|---|---|
| Leverage | Buying with borrowed money, which magnifies gains and losses. | Depends entirely on the rate environment. |
| Multiple expansion | Selling at a higher valuation multiple than was paid. | Largely market conditions, not skill. |
| Operational improvement | Growing revenue or margin in the underlying business. | The only genuinely repeatable source. |
Ask for the attribution
A manager whose historic returns came mostly from leverage and rising multiples during a decade of cheap money has not demonstrated much. Ask them to attribute past returns across these three. A good manager has the answer ready.
The fee stack, honestly
- Management fee
- Commonly around 2% a year, often charged on committed capital during the investment period — including money not yet drawn.
- Carried interest
- The manager’s share of profits, typically 20% above a hurdle.
- Hurdle rate
- The return investors receive before carry starts, often 8%. Whether it is a hard hurdle or subject to catch-up matters enormously.
- Catch-up
- A clause letting the manager take a large share of returns just above the hurdle until they have their full 20% of everything. Easy to miss, expensive to ignore.
- Transaction and monitoring fees
- Charged to portfolio companies. Ask what share is offset against the management fee — the answer varies from all to none.
Gross to net is the only number that matters
A fund reporting a gross return of 20% may deliver something in the low teens net. Always ask for net-to-investor figures, after every fee, and for the same vintage as your commitment.
Why the headline number can mislead
- IRR is time-sensitive: an early, quick exit inflates it permanently, even if little money was made.
- A multiple on invested capital ignores time entirely — 2x over four years and over twelve are very different.
- Unrealised value is the manager’s own estimate until an asset is actually sold.
- Subscription lines of credit delay capital calls and flatter IRR without improving the outcome.
- Quartile rankings depend on which peer set is chosen, and the manager usually chooses it.
Ask for DPI
Distributions to paid-in capital is cash actually returned divided by cash actually put in. It cannot be estimated or flattered. For a mature fund it is the honest number.
Questions worth asking
- 1What is your net-to-investor return by vintage, and what is DPI on the mature funds?
- 2Attribute past returns across leverage, multiple expansion and operational improvement.
- 3How much of your own capital is in this fund, and is it cash?
- 4Is the hurdle hard, and is there a catch-up? Show me the arithmetic on a worked example.
- 5What share of transaction and monitoring fees is offset against management fees?
- 6What happens if key people leave? Is there a key-person clause with teeth?
- 7How many funds have run past their stated term, and why?
Documents you may also need
Alternative Assets: Beyond Equities
Private equity, venture, property, infrastructure and private credit — what each actually is, what you give up to hold it, and who they suit.
MasterclassRisk Management in Volatile Markets
What risk actually means, why volatility is a poor proxy for it, and the small number of things that reliably help when markets fall.
InsightsInsights Archive
Everything we publish, in one place: research, guides, masterclasses and the help centre — with an honest note on what an archive is and is not.
This document was last updated on 1 August 2026. We publish the current version here at all times; superseded versions are available on request.
If anything on this page is unclear, write to us and we will explain it.