Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What type of company are private equity firms usually set up as?

1. Public limited companies

2. Private limited companies

3. Corporations

4. Limited partnerships

The correct answer is: Limited partnerships

Private equity firms are typically structured as limited partnerships because this structure allows them to take advantage of certain legal and tax benefits. In a limited partnership, there are general partners and limited partners. The general partners manage the investments and operations of the fund, while limited partners provide capital but do not have a say in day-to-day management. This framework helps facilitate the collection of capital, typically from institutional investors and high-net-worth individuals, while limiting their liability to the amount they have invested. Moreover, the limited partnership model is advantageous for private equity firms, as it aligns the interests of the managers and investors. The general partners often invest their own capital alongside limited partners, promoting a shared goal of achieving high returns on investments. Additionally, the pass-through taxation that limited partnerships offer can lead to tax efficiencies for the investors. This structure is preferred in the private equity industry as it allows for a more straightforward operational process while also providing investors with limited liability and clearer insight into the firm’s structure and operations.