Fund raising in private equity refers to the actions of a private equity firm looking for capital from the investors for funds. Investors make investments in specific funds managed by firms, becoming limited partners in the funds, instead of the investors themselves.

Therefore, you need to understand how private equity funds are raised and how the equity funds are managed. Basically, the entire process has been divided into 6 stages which are fund raising for the limited partners, portfolio acquisition search, investment, growth, divestment and dispersal of the funds back to the limited partners.

In the first stage of capital fund raising, capital is raised for funds through investments made by the limited partners in the form of endowments, pensions and institutional funds. Before raising the capital, the private equity firm will normally establish the size of the target fund and based on the track record of the firm and general economic situation, efforts made can be over-subscribed or under-subscribed.

In the second stage of acquisition search, firms start looking for potential portfolio investments. Some firms meet directly with the company that is interested in selling, while others may be introduced by an investment banker. After which, in the third stage of Investment in the portfolio companies, the private equity firm has to select the potential portfolio company in which it would like to invest. It will go through acquisition transaction process for acquiring new portfolio companies.

In the fourth stage of corporate growth, private equity firm will use its aggressive growth strategy to create value and thus, enhance the valuation of its portfolio. Following that, in the fifth stage of divestment, the private equity firm eventually converts its equity value back by liquidating the portfolio holdings. This is because limited partners have no infinite investment scope. Divestment occurs in the form of buyouts, strategic acquisition, initial public offering and other firm purchasing the portfolio investment. No matter how transpiration happens, the portfolio company’s divestment creates liquidity event, essentially converting the equity into cash or other equivalents.

Private equity firm makes money both from cash flow and capital gains. The liquidity process produces capital loss or gain for the partnership and thus, results of the investment are received. In the final stage of dispersal of funds, the dispersal of capital loss or gain from the funds to the limited partners provides them a definitive return on their investment for the entire life of the funds.

Long before the dealings with particular funds are finalized by the private equity firm, it starts raising money for next funds. That is why, it is known as the Private Equity Fund Management Cycle. As we could see, the service of such private equity funds management provide one stop investment service for its clientele , handling all of the works involves in making sound investment.