What is a 'Private Investment Fund'

A private investment fund is an investment company that does not solicit capital from retail investors or the general public. To be classified as a private investment fund, a fund must meet one of the exemptions outlined in the Investment Company Act of 1940. The 3C1 or 3C7 exemptions within the Act are frequently used to establish a fund as a private investment fund. There is an advantage to maintaining private investment fund status, as the regulatory and legal requirements are much lower than what is required for funds that are traded publicly.  

BREAKING DOWN 'Private Investment Fund'

Private investment funds are expected to meet certain criteria to keep their status. Generally the requirements limit both the number and type of investors that can own shares in the fund. In the U.S., under the aforementioned Investment Company Act of 1940, a 3C1 fund can have up to 100 accredited investors and a 3C7 fund can have a soft limit of around 2,000 qualified investors. Both the definition of qualified and accredited investor come with individual wealth tests. Accredited investors need to have more than $1 million in net worth without counting their primary residence and/or $200,000 in annual income for an individual and $300,000 for a couple. Qualified investors have to hold assets in excess of $5 million.

Why Funds Stay Private

A private investment fund may choose to stay private for a number of reasons. As mentioned, the regulations around private investment funds are much looser than for public funds. Private investment funds enjoy more freedom in how they handle everything from reporting to redemptions. This allows private investment funds to look at illiquid investments that a public fund would shun due to the difficulties of regular valuation and liquidation in the case of rising redemptions. Many hedge funds are private investment funds so they can continue to use aggressive trading strategies that the manager of a public fund would avoid due to the potential for investor lawsuits resulting from unreasonable risk-taking. Most importantly, there is no public reporting of positions for private investment funds, which allows them to avoid tipping their hand to the market and eroding the profitability of a stealthily built position.

In addition to investment flexibility, private investment funds can be vehicles of choice for handling significant family wealth. Extremely wealthy families can create private investment funds to invest the wealth with the family members as shareholders. Often a company serves as the initial structure for this arrangement, and it is repurposed to create a capital investment arm from the profits of the business. In this case, the family doesn't want or need outside capital, so there is no incentive to take the fund public.

RELATED TERMS
  1. Private Sector

    The private sector is the part of the economy that is not state ...
  2. Fund

    A fund is a source of money that is allocated for a specific ...
  3. Private Banking

    Private banking includes personalized financial and banking services ...
  4. Investment Company

    An investment company is a corporation or trust engaged in the ...
  5. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
  6. Fund Company

    Fund company is a commonly used term to describe a corporation ...
Related Articles
  1. Investing

    Grasp the Accounting of Private Equity Funds

    Read about private equity accounting and how it is different than that of other investment vehicles. The nature of private equity makes a difference.
  2. Managing Wealth

    How to start your own private equity fund

    Use this how-to guide to launch your own private equity firm.
  3. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  4. Financial Advisor

    Should My Portfolio Include Private Equity?

    Private equity offers a lot of potential, but is it worth the risk?
  5. Investing

    Investing in Hedge Funds Vs. Private Equity in 2016

    Discover how hedge funds and private equity face challenging market environments in 2016 and learn about funds that performed well in 2015.
  6. Financial Advisor

    How To Invest In Private Equity Real Estate

    A brief introduction to private equity real estate, and what investors should know if they want to get started.
  7. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  8. Retirement

    Coming Soon: Private Equity In 401(k) Plans

    The day will soon come when private equity is commonly found among 401(k) plan investment options. Here's who's leading the charge and what to watch for.
RELATED FAQS
  1. How does privatization affect a company's shareholders?

    The most recognized transition between the private and public markets is an initial public offering (IPO). Through an IPO, ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center