How to Raise Your Own Private Equity Fund
Are you done working for others and ready to start your own private equity fund ? Many investment managers come to a point in their careers where they’re ready to go solo.
Historically speaking, private equity firms have been a successful asset class with an industry that continues to grow. The demand for alternative investment in the realm of private equity continues to grow, proving the need for new managers to provide investors with new opportunities.
If you’re ready to emerge as a new private equity fund manager, here are the steps to take to get you started right:
Outline Your Business Strategy
While the demand may be high, there’s still plenty of competition. You need to differentiate your financial goals and do extensive research on the defined market or sector you intend to focus on. Find a niche that’s not oversaturated with competition.
In planning for a fund, managers must assess not only a specific investment that is immediately available for detailed evaluation but also future investments that may not be available at the time the fund is raised.
When dealing with issues related to profits, fees, and costs required to design the fund’s commercial model, consider the likely outcomes and understand their tendencies to change due to the unpredictability and shifts in the market.
Write a Business Plan and the Operations
Start with calculating your cash flow expectations and establish your private equity fund’s timeline. Don’t forget to include the period to raise money and exit from portfolio investments.
Set up an external team of consultants that should include lawyers, independent accountants, and consultants. You will need their expertise and insight into the industries of the organizations in your portfolio.
Establish your firm and fund name and decide on the roles and titles of your firm’s leaders. Define your management team which is typically composed of the CEO, CFO, Chief Compliance Officer, and Chief Information Security Officer.
When raising capital for the fund, you can start with your own money, or you can accept funds from accredited investors.
Remember that there are federal laws that impact who can invest in private equity funds. Under Rule 501 of the Securities Act, an individual is an accredited investor if he or she has a net worth that exceeds $1,000,000 or an income in excess of $200,000 in each of the two most recent years.
Investor expectations will vary and depend on their goals and relationship to the sponsor. Something to consider is investing your own cash. Investors are less hesitant to invest in a fund if they know that the sponsor also has their own money invested along with them.
Once your private equity fund has been established, you now have the capacity to build your portfolio. At this point, you can start to select the companies and assets that fit your investment strategy.
Because private equity investments have outperformed over the last couple of decades, the demand from investors has increased as they seek new ways to generate returns. Now is an excellent time for you to venture into the challenging but rewarding realm of private equity funds.
Most importantly, do not even try to raise your first fund without having at least a solid track record of at least 4-5 exits in the past. If not, it is a total waste of time.
Personal brands are determined by a track record of actions, not a track record of plan.
If there’s a proven track record, the odds are higher that success can be repeated. This is what we investors always hope for.