As private equity firms continue to succeed and become ever prevalent in the alternative investment space, more aspiring portfolio managers are joining the race to launch their own private equity fund. The following summarizes the foundational steps that managers should follow to launch a private equity fund.
Outline your business strategy
Establishing a business strategy requires a significant investment of time, effort, and research to determine, and includes your answers to many key questions to establish your private equity fund successfully. For example, will your fund focus on a specific sector or industry? Will you have a geographic focus, such as one region of the United States, an individual foreign country, or certain emerging markets? Ultimately, potential investors will want to know more about your fund’s strategy, so being prepared to address these and other relevant questions will go a long way in helping you to raise capital for your new fund.
Setting up operations and a business plan
Starting your own private equity fund is in many ways not that different from starting any other business. You’re going to need a business plan which, among other things, calculates expected cash flow and establishes your fund’s timeline, including the capital-raising period. Private equity funds generally have an average life of seven to 10 years, although it is usually up to the manager’s discretion and the execution of a solid business plan. A sound business plan contains growth strategies, a marketing plan, and a detailed executive summary with a conclusive section tying all these areas together.
Once a business plan has been completed, you should begin to meet with external service providers and consultants, such as accountants, attorneys, and other industry specialists, who can assist you with effectively and efficiently refining and executing your business plan.
Another important step is to form a firm to manage the fund and determine a fund name. The fund manager must decide on the roles and titles of the firm’s leaders, such as the role of partner or portfolio manager as well as the establishment of a management team, including the CEO, CFO, CIO, and CCO. At launch, however, it may be wise to outsource some of these functions to allow you time to execute your business plan while keeping costs in check.
If you plan to raise a fund in the U.S., you may already know that fundraising is heavily regulated and that there are numerous legal and regulatory requirements that a fund manager must adhere to in order to comply with securities laws. The Securities & Exchange Commission (SEC) takes this compliance very seriously and a qualified attorney must be involved in the process early to make you aware of the rules and regulations associated with fundraising, investing, and managing the fund.
Here are some key questions to discuss with your attorney:
- Who will I be able to raise money from?
Regulations offer various options for a fund manager raising money, primarily depending on, and related to, the type of investors, the type of marketing, and the amounts being raised.
- How can I raise the money?
In addition to understanding which investors can participate in a fund, a fund manager should understand how those investors may be approached to invest. The fund manager will need to think carefully about what the message to investors will be and how it will be delivered.
- What kind of money can be invested?
Another concern is the type of money that a fund or fund manager can accept. There are a variety of restrictions in this area, but the two most common are investments from retirement accounts and investments from foreign accounts. Each of these areas creates potential issues regarding how a fund manager can invest, manage and report results to investors.
- How much will the legal work cost?
Every fund and every attorney is different, but you can expect start-up legal costs to run from $50,000 to more than $100,000.
By limiting the fact-finding phase of fund formation, a fund manager can focus their attorney’s time and effort on key compliance questions and avoid expensive discussions and rewrites. Having your fund’s marketing materials and a draft of its investment strategy and fee structure ready for review as you begin the legal process will also help to control legal costs as you look to launch your private equity fund.
Starting a private equity fund can be challenging, especially for those who don’t have any experience in doing so. It requires partnering with experienced accountants and other professionals, a tremendous effort to refine your business strategy, setting up operations, a business plan, and legal considerations. The above steps can be used as a foundational roadmap to establish a successful fund.