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Today I wanted to go over some of the basics and fundamentals of starting a Private Equity Fund.
There is a lot to talk about so if you want to the full 30 minute explanation then click on the video above.
If you are here for the basics then perfect.
All the things I’m going to talk about are things that I’ve personally leanred from mentors, my dad, and from experience in starting my own fund.
Let’s dive into it!
The Basics of Private Equity Funds
What is it?
So what is Private Equity?
Private Equity is when you raise money and then invest that money buy purchasing private companies that may be distressed or have growth potential.
It’s kind of like flipping a house.
You find something that needs work and has unseen value and then you fix it up and sell it to someone else for more money,
Or keep it if you like the cash return.
Now you can do this with a lot of different businesses.
The most commonly heard of are tech companies, but there is a lot more in the world than just that.
I have a friend who buys mom and pop funeral homes and then sells them in bulk to larger PE Firms.
I also know of people who do this with amazon businesses.
The possibilities really are endless.
How do you get paid?
We’ve talked about this before in other posts, but for a quick review…
You have a General Partnership that is governed by Fund Manager,
And then a you have a Limited Partnership that Investors (or Limited Partners) will park their money in for you to invest with.
Make sense so far?
Now there is another entity that you will set up called your Investment Advisor if you are under $150 million or a Registered Investment Advisor if you are over $150 million.
This is what deals with the SEC and how you get paid management fees.
The way we get paid is based on a few different things…
The first is based on what’s called a pref or preferential rate of return.
In my fund we have an 8% pref…
This means that the first 8% of all returns goes to my limited partners without a fee.
So if I get a 7% return then ALL that money goes to the investors.
This is to reward investors for investing in my fund.
Next, between 8%-10% I keep all of those profits.
Once our return reaches over 10% then we split the return 80/20.
This means I would get 20% of each percentage over the 10% mark.
Then lastly, once we reach a 20% return I will split 50/50 for every percentage after that.
My fees are solely based on performance.
This incentivizes me to do well for my investors.
Now, some funds do charge a management fee which is typically 2%, but mine don’t.
So that’s up to you on what you want to do.
Make sure that the fees are clearly listed out in your fund documents for your Limited Partners. These will become the “Bible” of the fund and will be the law of you agreement with them.
The Fund Launch Formula
Now what I teach my students is a little less traditional then what someone on Wall Street might do when launching their fund.
Wall Street will tell you to hire some lawyers costing between $30K-$60K.
Then they’ll tell you to pitch investors.
Well what happens if investors don’t like the idea or your investment theory?
Now you have to go back to the drawing board and still cover the legal fees!
So here is a better way to launch your fund…
I had a mentor tell me once that the reason why people fail is because they don’t believe in the deal themselves…
It isn’t full proof and it’s too risky.
With our fund launch formula we aim to take this away completely.
Our formula helps people understand that they first need to find an incredible deal,
One that is full proof.
Next, you frame the deal out.
You write down all the numbers and fees and returns all on one clean sheet that’s easy to understand.
Now this is where we are different.
We tell people to go and pitch investors before they even set up the fund.
The reason why is because investors will trust you more if you have an actual deal than if you theorize what you might do with their money.
After you have enough money in soft commitments then you know that you can go and get your legal documents and fees taken care of.
The best thing is that the money spent on those documents is reimbursable by the fund.
You have gone and eliminated basically all risk and it is up to you to deliver the deal and see it through.
Conclusion
Launching a fund doesn’t need to be risky.
You don’t have to follow Wall Street’s way.
In fact, I don’t believe it’s a good idea to follow their way.
I sure don’t because it’s too risky for me.
I have been able to raise millions of dollars safely and with a plan.
I hope this shred a little more light on how to start a Private Equity fund for you.
Again, if you need some more details on this please watch the YouTube video above and subscribe to the channel for more content.
If you have any questions please connect with me on social media or join or free facebook group below!
Take Care,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
