Private equity firms have been a historically successful asset class, and the filed continues to grow as more would-be portfolio managers join the industry. More investors have moved from public to private equity because the latter has significantly outperformed the Standard & Poor’s 500 over the last few decades. This fuels a greater demand for private equity funds from institutional and individual accredited investors.
There are many successful private equity firms today including Blackstone Group, Apollo Mangement, TPG Capital, Goldman Sachs Capital Partners, and Carlyle Group. However, most firms are small to mid-size shops and can range from just two employees to several hundred workers. Below are several steps managers should follow to launch a private equity fund.
Define the Business Strategy
The first step is to outline your business strategy and differentiate your financial plan from those of competitors and benchmarks. Make sure to do an ample amount of research into a defined market or individual sector when establishing the business strategy.
Set Up the Business Plan and the Operations
The second step is to write a business plan, which calculates cash flow expectations, establishes your private equity fund’s timeline, including the period to raise capital and exit from portfolio investments. 10 years is the typical life of each fund, although ultimately timelines are up to the manager’s discretion.
Establish the Investment Vehicle
Establish the fund’s legal structure after early operations are in order. In the U.S. a fund typically assumes the structure of a limited partnership or a limited liability firm. As a founder of the fund, you will be a general partner, meaning that you will have the right to decide the investments that compose the fund.
Determine a Fee Structure
Typically the fund manager takes care of all provisions related to management fees, carried interest and any hurdle rate for performance. Annual management fees are at 2% of committed capital from investors and this is what the manager will most likely be receiving. The manager will collect $200,000 in management fees annually. However, fund managers with fewer experience may receive a smaller management fee to attract new capital.