How a private equity fund works in Asia: partners, calls and fees

Read a fund the way you would read a lease: who is bound, for how long, and what it costs. Private equity answers all three in one document, the limited partnership agreement, and the rest of the jargon hangs off it.

The rules change from city to city. This page uses Hong Kong, Singapore and the Cayman Islands as its Asian reference points, and it marks every rule that belongs to the United States alone.

The structure in one picture

Start from the fundamentals section if you want the map. A private equity fund is a pooled vehicle: the adviser pools the money of all the investors and invests it for them¹. The firm that raises and manages it acts as general partner and adviser, and the investors join as limited partners². Most funds take the form of a limited partnership, and the limited partnership agreement, the LPA, sets the terms².

Hong Kong gives that partnership its own statute. The Limited Partnership Fund Ordinance came into operation on 31 August 2020⁵. A fund registered under it has one general partner and at least one limited partner⁵ and an office in Hong Kong⁵. The general partner must appoint an investment manager for the day-to-day investment management of the fund⁵, and an auditor⁵.

The limited partner’s side of the bargain is short⁵:

• a right to share in the income and profits of the fund⁵;
• no day-to-day management rights and no control over the fund’s assets⁵;
• no fiduciary duty to the general partner or to other limited partners⁵;
• no liability for the fund’s debts beyond the agreed contribution⁵.

Nearly all investors in private equity are passive and rely on the manager to make investments and generate liquidity². Governance rights for limited partners are typically minimal².

Where limited liability stops

In plain terms: an investor can sit on the fund’s committee, vote on a term extension and read the valuations without losing limited liability, but running the fund is another matter. The last bullet has an exception, and it is the clause an expert reads first. If a limited partner takes part in the management of the fund, that partner and the general partner are jointly and severally liable for the debts and obligations the fund incurred while the partner so takes part⁵. That is section 26(5)⁵.

Section 27 draws the safe harbour. Doing any activity listed in Schedule 2 does not count as taking part in management⁵, and the list does not limit other cases⁵.

What the schedule covers, among others

• serving on a board or committee of the fund⁵;
• consulting on, reviewing, approving or advising on the accounts, the valuation or the assets of the fund⁵;
• calling, attending or taking part in a partners’ meeting⁵;
• approving or disapproving an amendment to the LPA⁵;
• taking part in a decision on the fund’s borrowing, a change in its investment scope, or an extension of its term⁵;
• acting as guarantor for the fund⁵;
• suing for the fund when the general partner refuses without good reason⁵.

Funds in the more developed markets typically keep an investor advisory committee made up of a small sample of the investors⁸. The statute is the legal room that committee works in.

The Cayman Islands draw the line in different words. A limited partner who takes part in the conduct of the business in dealings with persons who are not partners can be liable if the partnership becomes insolvent¹⁴. The liability runs only to someone who dealt with the partnership knowing of that participation and who reasonably believed the partner to be a general partner¹⁴. Cayman’s safe harbour includes consulting with and advising the general partner and consenting, or withholding consent, to a proposed action¹⁴, and attending partners’ meetings¹⁴.

Hong Kong asks whether the partner took part in management. Cayman asks whether an outsider relied on the partner. The Hong Kong text above is the Ordinance as enacted in 2020⁵. Read the current text on e-Legislation before relying on a clause.

Firm, fund, portfolio company

Three terms are often confused:

• The firm is the management business and acts as general partner and adviser².
• The fund is the partnership that holds the investments².
• The portfolio company is the business the fund buys into¹.

One firm usually runs a series of distinct funds², and follow-on funds tend to arrive at intervals of around five years⁸. That is why an investor in one fund is often asked about the next.

Where the fund sits in Asia

The same partnership comes in three Asian wrappers. Which one a manager picks follows the investors, the tax advice and the licence it holds. The table sets them side by side and ranks none.

Hong Kong. Under the SFC Licensing Handbook, a firm delegated discretionary power to make investment decisions on securities for a fund in Hong Kong must hold a licence for Type 9 regulated activity⁹. Under the Securities and Futures Ordinance, Type 9 means real estate investment scheme management or securities or futures contracts management⁹. A licensed manager then works under the SFC’s Fund Manager Code of Conduct, which applies to licensed persons whose business involves managing collective investment schemes¹⁰. The Code calls for arrangements to identify, prevent, manage and monitor conflicts of interest¹⁰ and for material conflicts to be disclosed to fund investors¹⁰.

Singapore. A VCC is built for investment funds, not businesses¹². It can issue and redeem shares without shareholder approval and pay dividends from capital as well as profit¹², and its member list need not be public¹². Each sub-fund can be wound up or struck off on its own¹². Every VCC appoints one permissible fund manager¹³. ACRA’s list has three routes: a holder of a capital markets services licence for fund management under the Securities and Futures Act¹³, a registered fund management company¹³, or an exempt financial institution¹³. The tests for each route sit in that Act and its regulations, which this page does not reproduce. The VCC’s director must be a qualified representative or a director of the fund manager¹³.

Cayman Islands. A fund that offers interests to pool investors’ money is a private fund under the Act¹⁵. It cannot carry on business in or from the Islands unless it has applied to register with the Monetary Authority within twenty-one days of accepting capital commitments¹⁵.

Who puts money in

Funds are sold to professional investors, not to the public, and each city draws the line with its own test. The figures below are the ones in the cited papers on their dates: a 2020 Hong Kong paper, and section 4A of Singapore’s Securities and Futures Act. Statutes change, so confirm the current text before relying on any figure^11,16.

Private equity funds are among the private placement products offered to Hong Kong professional investors¹¹. The offering-document prohibition in section 175 of the Securities and Futures Ordinance does not apply to an offer made to them¹¹. A May 2020 review left the thresholds unchanged¹¹.

Pension plans and insurance companies may put part of their large portfolios into private equity funds¹. A pension-plan member can therefore be exposed to a fund without ever signing a fund document¹.

One rule here is United States only. There the funds themselves are not registered with the SEC, even when their adviser is, and so they carry no regular public disclosure requirements¹. An investor sees the detail in the offering documents and agreements¹.

What a fund does with the money

The usual play is to take a controlling interest in an operating company and take an active part in directing it¹. Other funds make minority investments in fast-growing companies or startups¹. The strategy pages go deeper on each style, starting with buyouts compared with growth equity, which also carries the Asian deal mix, and how a firm describes its investment approach.

The price paid is usually a multiple of the company’s historical income². Some deals are highly leveraged, which is where the term leveraged buyout comes from². The cash flow of the portfolio company usually repays that debt, and commercial banks most often provide it². Funds commonly buy through a newly created acquisition subsidiary that the fund controls². It is an ordinary company set up for the deal.

The commitment and the capital call

An investor does not hand over the whole sum on day one. Institutional investors make an unfunded commitment to the limited partnership, and the commitment is then drawn over the term of the fund². The mechanism is the capital call: when managers are ready to buy, they issue a call and investors transfer the money⁷. Committed capital is available to be drawn throughout the life of the fund as opportunities appear⁸.

The commitment is a ceiling, not a promise to spend it all. If a firm cannot find suitable opportunities it will not draw the commitment, and the investor may end up investing less than expected². The reverse holds too. Until the money is called, the investor still owes it.

The ten-year clock

Private equity funds are typically close-ended and raised with a life span of ten years⁸. Most carry the option to extend, typically with investor agreement, by up to three 1-year extensions⁸. A typical fund cycle opens with an investment period of around five years⁸, and that matches the academic study of fund terms: new companies in the first five years, follow-on investments and exits in the last five⁶.

That study used records on 238 funds raised between 1992 and 2006⁶. About three-quarters of them focused on the United States and most of the rest on Europe⁶. Treat its percentages as history, and as a US and European sample, not an Asian one.

Each investment is held for less than the fund’s life. The time a fund holds a company is generally well below ten years and more often around three to five⁸.

The practical result is a lock-up. An investment in a private equity fund is often illiquid, and holding it for several years before any return is realised may be necessary¹. Funds typically limit an investor’s ability to withdraw¹. A fund interest is not meant to be traded, although it can be transferred to another investor², usually with the manager’s consent². Distributions are made as investments turn into cash, and limited partners typically cannot demand a sale². An investor should be able to wait the requisite period before realising a return¹.

What the manager is paid

Back to the lease. The management fee is the rent, paid whether or not the building appreciates. Carried interest is the share of the upside.

The fee

Once investors commit, they pay an annual management fee, typically 1 to 2%⁸. During the investment period it is generally a percentage of total commitments, and afterwards a percentage of invested capital⁸. In the 1992 to 2006 sample the most common initial fee level was 2 percent⁶. At 2 percent a year for ten years on committed capital, lifetime fees would reach 20 percent of commitments and investment capital would be the other 80 percent⁶.

Many funds soften that. One example is a 2 percent fee in the five-year investment period, falling by 25 basis points a year for the next five⁶. For most funds in that sample, lifetime fees came in below 20 percent of committed capital⁶. The median was 12 percent for buyout funds and 17.75 percent for venture funds⁶.

Buyout funds can earn on top. Transaction fees and monitoring fees are common for buyout funds and rare for venture funds⁶. Portfolio companies may pay the firm for such services¹.

The carry

The second source is carried interest, a share of the profits paid to the manager, circa 20% above a pre-agreed return called the hurdle rate⁸. The word interest has no link to interest rates or to a loan or bank account³. In the sample, all 144 buyout funds used 20 percent as their carry level⁶.

Three terms define carry in practice⁶:

• Level: the percentage of profit the general partner claims⁶.
• Basis: the standard by which profit is measured⁶.
• Hurdle: whether the general partner must first give limited partners a preset return⁶.

Carry is paid after investors are made whole. The waterfall first returns each investor’s initial capital contribution³. Where there is a hurdle, virtually all funds in the sample set it between six and ten percent⁶. Hurdles are common among buyout funds and less so among venture funds, at 93.1% against 47.6%⁶. The majority of funds with a hurdle have a catch-up rate of 100 percent⁶. Carried interest is paid out only on a successful exit, which may take years³.

The simplest case in the study is a fund with no hurdle. Limited partners receive every dollar of exit proceeds until they have their whole committed capital back, and then the general partners receive 20 cents of every dollar after that⁶. The study’s own example is a fund that made $20M of profit on $100M of committed capital, and the general partners received 20 percent, or $4M, of that profit⁶. Laid out step by step, with the two subtractions and the 80% share added by us:

With a hurdle the order changes. A catch-up is the stretch where the general partner takes all, or most, of the next profit until it has caught up to its full share of the profit so far. The next table is our illustration, not a study figure. It is a one-off simplification: a simple 8% hurdle applied once, a full catch-up and the same profit as before, whereas a real fund follows its own agreement.²

The hurdle protected the limited partners’ first slice of profit, and the catch-up then brought the general partner up to its full share. With a profit smaller than the hurdle, limited partners would keep all of it and the general partner would earn no carry.

Early carry has a catch. When a fund pays carry early, limited partners typically have the right to claw it back if later performance is too weak to return the full carry basis⁶.

The terms in one table

For current fee rates, read the 2021 row and not the 2010 one. Two of those sources are old: a 1992 to 2006 sample, mostly US and European, and a regulators’ summary from 2010^6,8. The one current public benchmark found is ILPA’s 2021 fund terms report. In it, management fee rates held steady at 1.5 to 2.0%¹⁷. The survey covers LPs invested in growth and buyout funds. Among those with Asia Pacific funds of $3-5B, 90% reported rates below 2%, against 76% in North America and Europe¹⁷. The whole-of-fund, or European, waterfall remains the dominant carry structure worldwide¹⁷. No current public benchmark for Asian carry or hurdle rates was found, so those rows stay on the labelled historical sample.

The same report shows where the fee does not reach. Deal sourcing costs, adviser and affiliate salaries and regulatory filings are routinely charged outside the management fee¹⁷. Read the headline rate together with the expenses clause. Side letters can also give an investor extra terms of its own⁸. For how a manager should report fees, expenses and carry, the standard is the ILPA Reporting Template¹⁸. In 2021, 59% of LPs reported receiving the industry standard fee template at least half the time¹⁷. The updated template, released in January 2025, replaces the 2016 version for funds still investing in the first quarter of 2026 and for funds starting on or after 1 January 2026¹⁸.

How it ends: exits

The fund makes money when it sells. The exit routes have historically been an initial public offering or a sale to a strategic acquirer, known as a trade sale². A sale to another private equity firm is called a secondary². The deal pages follow each route. The investment approach page covers the Asian side, including Hong Kong’s IPO window.

What the standards bodies ask for

Investors have a trade body of their own. The Institutional Limited Partners Association built its Private Equity Principles to prompt talks between limited partners and general partners about fund partnerships⁴. Three principles form the core: alignment of interest, governance and transparency⁴. The third edition was published in June 2019 and covers fund economics, fund term and structure, key person, governance and disclosure⁴.

Risks, in plain words

Private equity can lose money, and an investor can lose all of its investment². Conflicts of interest are part of the structure. As fiduciaries, advisers must make full disclosure of all conflicts of interest between themselves and the funds they manage¹.

This page explains how funds work. It is not an offer, a recommendation or advice, and it does not rank funds or managers.