How to start a private equity fund
Today most PE firms are mid-size or small enterprises with 2 to 100s of employees. To start a PE fund is a well strategized and thought of venture. Managers should follow these essential steps when launching a private equity fund. The large PE’s include the well known TPG Capital, Carlyle Group, Goldman Sachs Capital Partners, Apollo Management, and the Blackstone Group. The main steps of your roadmap to successfully starting a PE fund are detailed below.
Business strategy forming:
The first step is to outline the sectors of your business strategy. Make your financial plan unique and different from your competitors and normal benchmarks. Base the business strategy on documented research into a specific market or sector. Some examples are energy development, biotech or fintech companies. The baseline is that your fund goals are important to your investors.
Operations and Business Plan:
Just as in good plans, record yours with fund-time frames, calculated cash flow, capital raising periods, the time taken to exit investments in portfolio management, and your detailed 10-year plan. Let your strategy and action plan sew the goals recorded details together. Your strategy will include advisory board, think-tank setting up, back end operations, staff hiring, documenting policies, compliance measures and all details of the most major event of PE fund set up.
Investment Vehicle establishment:
After your early operations house is in order to move to establish the legal structure of the fund. Will it be a private limited, partnership, LLP, or LLC? Enrol the services of a good lawyer to form the articles of association or legalese involved in legally establishing the fund.
Fee Structure Determination:
Set out the provisions for management fees, carried interest and other rates for fund performance. Typically, annual management fee to fund manager is 2% of the investment committed capital received from investors
Te carried –interest should be about 20% above the anticipated return levels while the hurdle rate is 5% and the returns split in a 20:80 ratio, between you and investors. Ensure the setting up of norms of compliance, valuation, risk etc. for the PE fund.
Finally, you are ready for the PE capital raising stage.
You will need the:
• Offering memorandum
• Subscription agreement
• Partnership terms
• Custodial agreement
• Due diligence questionnaires
Ensure materials for marketing are ready well before raising capital. Severance letters of new fund managers are to be recorded. This is when you move into the crucial investor finding stage. Invest your funds and ensure capital commitments from your fund managers.
Your marketing panache and networking is the pivot of your fund. Ensure compliance in investments from accredited investors, institutional investors etc. Your fund managers can build on their portfolios and target their clients from there on.
To get a clear picture of how to go about setting up a Private Equity Fund one needs to research well, have a great network of clients and proper knowledge. Do short financial analysis courses online to revise and equip yourself with the small details required in setting up your fund. You can also do an accredited financial analysis course and obtain a certification that will stand you in good stead on your sojourn into your PE fund. Most of these courses will give you insights into theoretical and practical aspects that you have possibly forgotten. Best of all it allows you to move forward confidently.
In parting, the roadmap is a sure way of finding your way through unchartered territory. PE funds are thriving, growing and out-classing other forms of funds.