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The structure of private equity firms

Sweden is one of the leading countries in Europe when it comes to the number of private equity firms in the market, their total assets under management, and their level of returns. This is remarkable for a country with only ten million inhabitants. Also remarkable, is that 20 years ago Swedish private equity firms only held a place in the periphery of the market while they are now an integral part of it. Below, Valentum offers a walk-through of how private equity firms are structured.

General Partner (PE firm)
The private equity firm takes the role of general partner, which means that it makes a smaller investment in the fund andmore importantlyis responsible carrying out acquisitions and managing the portfolio companies. In return, the general partner usually receives a predetermined management fee as well as a share of the profits, provided that the total returns exceed a certain level.

Limited Partners (Investors)
Limited partners only contribute with their capital and thus become co-owners of the fund. Common limited partners in Swedish private equity funds are institutional investors such as insurance companies, pension funds, universities and public authorities, but also wealthy individuals. A significant share of the capital, often close to 50%, is provided by institutional investors.

The keys to success for a private equity firm

Extensive industry knowledge
Before any investments are made, meticulous analysis of a company’s market and its position in it is carried out. This ensures that new plans can be implemented swiftly after the acquisition.
Active ownership, short decision paths
Since private equity firms typically are majority shareholders in their portfolio companies, decisions can be made and put into effect without the need of an annual general meeting.
Strong incentives
Private equity firms put a lot of effort into finding suitable leaders for their portfolio companies, and when they do they often seek to incentivise them to perform at a high level, for instance through stock options.
Using leverage
Private equity firms use large portions of debt when making acquisitions. This enables them to leverage their investments and achieve higher returns.

About Valentum

Valentum manages company sales in an innovative way, focusing on sales and acquisitions of large unlisted companies.

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