PRIVATE WEALTH SOLUTIONS

The Life Cycle of Private Equity

Private Equity managers aim to create value by providing investment capital
to a wide range of businesses.
Private equity differs from public equity investing in several important ways. Here we explain the life cycle and key features
of a private equity investment. In the three sections below, we examine private equity’s (1) structure, (2) time horizon, and
(3) differentiated performance measurements, each of which are critical to understanding the life cycle of private equity funds.

I. Building a Private Equity Fund: Structure Matters

Generally when a private equity fund is launched, the General Partner (GP) assumes responsibility for managing the fund
and identifying investments. Limited Partners (LPs) are investors who contribute capital, but do not necessarily have
discretion over the choice of investments. Performance incentives give the GP motivation to aim for strong performance,
which, if successful, benefits both the GP and LPs. The alignment of interests to a certain extent between the two parties
differentiates private equity from traditional investing. In their pursuit of returns, private equity managers typically aim to
provide various resources to a portfolio company and work closely with them to foster operational improvements.

Figure 1: The Structure of Private Equity Funds

Portfolio Company
General Partner (GP)
Fund Name III GP, LLC

Multiple Limited Partners (LP) Fund

Portfolio Company
Investor Fund Name III

Portfolio Company

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any
information in this document be relied on when making an investment decision. Recipients should consult their own financial advisers regarding the
information herein. There can be no assurance that an allocation to alternatives would yield returns or protect capital. There may be occasions when
a fund’s general partner and/or the investment advisor, and their affiliates will encounter potential conflicts of interest in connection with such fund’s
activities. Past performance does not guarantee future results.

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 II. Staging the Time Horizon: Capital Calls, Investment Period and Harvest Period
The term of private equity funds can be upwards of 7-10 years. One way of thinking about the term is by dividing it into
three stages: the fundraising period, the investment period, and the harvest period. After investors have committed capital
during the fundraising cycle, the fund will begin to incrementally call this capital during the early stages of the investment
period. This stage may span the first few years of the fund. Simultaneously, capital will begin to be deployed by investing
in opportunities selected by the GP in the first 3-5 years. The final 3-7 years, the harvest period, is generally when most
investments are realized, and the fund, if successful, returns any cash to investors.1

Figure 2: Illustrative Example of the Timeline of Private Equity Funds

Capital Calls
Return on Cash (IRR and Cash Flow)

Manager “calls” cash from investors

Investment Period
Manager puts cash to work

Harvest Period
Investments are realized, cash is returned
(if the fund is successful)
0
Time (years)

III. Analyzing Performance: The J Curve Effect

The J-Curve characterizes an investor’s potential performance experience through the life cycle of a fund. In the first few
years, investors are providing capital while also paying management fees. As the fund deploys the capital, returns are not
high enough to overcome fees, which results in a negative return. As time passes and if investments are successful, returns
can improve. When this process is mapped out, it creates a “J” shaped curve as illustrated in Figure 3.

Figure 3: Illustrative Example of the J-Curve

3-year
Duration
5-year
Duration
7-year
Duration

2 4 6 8

1. The amount and priority of distributions will vary depending upon the terms of the specific fund.
For informational purposes only. A fund’s offering materials provide specifics around terms and expenses. A fund’s expenses may offset or exceed
its profits. This information is not meant to be predictive of the performance of any particular fund, nor are they meant to suggest that all private funds
result in positive returns or may avoid loss of principal. Private equity investments involve significant risk and typically high levels of leverage. Hypothetical
performance results have many inherent limitations and no representation is made that any investor will, or is likely to achieve, results similar to those
shown. Each investor’s cash flows and returns will differ and may result in a total loss of principal. There can be no assurance that an allocation to
alternatives would yield returns or protect capital. Past performance does not guarantee future results.

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Important Disclosures
The views expressed in this commentary are the views of Private There may be occasions when a fund’s general partner and/
Wealth Solutions group of The Blackstone Group Inc. (together or the investment advisor, and their affiliates will encounter
with its affiliates, “Blackstone”) and do not necessarily reflect the potential conflicts of interest in connection with such fund’s
views of Blackstone itself. All information in this commentary is activities including, without limitation, the allocation of investment
believed to be reliable as of the date on which this commentary opportunities, relationships with the investment adviser’s and its
was issued, and has been obtained from public sources believed affiliates’ investment banking and advisory clients, and the diverse
to be reliable. No representation or warranty, either express or interests of such fund’s limited partner group.
implied, is provided in relation to the accuracy or completeness of
The foregoing information has not been provided in a fiduciary
the information contained herein.
capacity under ERISA, and it is not intended to be, and should not
Investment concepts mentioned in this commentary may be be considered as, impartial investment advice.
unsuitable for investors depending on their specific investment
The success of a fund will depend, in large part, upon the skill and
objectives and financial position. Tax considerations, margin
expertise of certain key professionals. In the event of the death,
requirements, commissions and other transaction costs may
disability or departure of any key professionals, the business and
significantly affect the economic consequences of any transaction
the performance of a fund may be adversely affected.
concepts referenced in this commentary and should be reviewed
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indicative of future performance.
interests of, or is suitable for, the investor. You should exercise
Recipients should bear in mind that past or estimated performance your own judgment and/or consult with a professional advisor to
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legal, tax or investment advice.
Recipients should be aware that an investment in a fund is
speculative and involves a high degree of risk. There can be no In Europe, this material is exclusively for use by persons who are
assurance that a fund will achieve comparable results, implement Professional Clients or Eligible Counterparties for the purposes of
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losses or that any expected returns will be met. A fund’s 2014/65/EU) and must not be distributed to retail clients or
performance may be volatile. An investment in a private equity distributed onward.
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sophisticated investors who can afford to lose all or a substantial
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August 2020