How to Start Your Private Equity Fund?: A Complete Guide

Aug 19, 2022 By Triston Martin


How to start your private equity fund? You may want to launch your fund and go it alone as an investor. Even though the first fundraising phase is fraught with uncertainty, most people tend to concentrate on investments and deals. This article lays out all you need to know to successfully raise a fund, including considerations in the disciplines of law, finance, human resources, and strategy.

Over the past few decades, private equity has dramatically outperformed the Standard & Poor's 500 Index, which has increased interest in private equity funds among qualified institutional and individual investors. This has led to a significant exodus of investment bankers from the government to the private sector. More managers will emerge to meet investor demand and offer new business opportunities as more people decide to invest in private equity funds.

Steps to Start Your Private Equity Fund

Define the Business Strategy

Describe your business's goal first, then explain how your financial strategy differs from that of your rivals and the standard for the sector. Any company strategy must begin with thorough research about the target market or industry. There are numerous possible venture capital allocations, some of which concentrate on biotech companies and others on energy research and development. Potential investors want to know what the long-term objectives of your fund are.

Consider it when you establish your investing approach if you plan to have a geographical specialisation. Will the fund concentrate on a specific area? Will there be a regional concentration on one country's manufacturing industry? Or will it emphasise a particular tactic in developing markets where it already has a presence? Your company's focus could change to various topics in the interim. Will strengthening the operational and strategic focus of the companies in your fund's portfolio be its primary goal, or will it also attempt to improve the balance sheets of the companies it invests in? Typically, private equity involves investing in privately held businesses. Each investment should be well thought out.

Establish The Right Investment Vehicle

Create the legal framework for the fund once you've created a viable business plan. Limited partnerships and limited liability companies (LLCs) are popular business arrangements in the U.S. and Europe. As the G.P. of the fund, your responsibility is to supervise all investment selections. Before accepting Limited Partners (LPs), conduct due diligence and anti-money-laundering/know-your-customer checks. You are responsible for any fund losses or market obligations; your limited partners are only responsible for their investments.

Your legal team's input is essential to the success of your fund. Your legal team will assist you in understanding and complying with regulatory obligations and negotiating data protection, disaster recovery, and cybersecurity procedures. They will also create the Limited Partnership Agreement (LPA). We have solid connections with the leading businesses in the sector regarding legal issues surrounding the formation of funds.

Set The Proper Fee Structure

The amount of money you and your investors will make will directly relate to this. The terms for management fees carried interest, and any performance hurdle rates shall be determined by you, the General Partner. Our analysis suggests that a G.P. should receive 2% of the total capital contributed by investors. Therefore, the fund manager will get a yearly fee of USD200,000 for every USD10 million invested in the fund by investors. However, it is customary for fund managers with less expertise or who are just getting started to get a lower management fee to attract new investors.

Typically, carried interest is calculated by raising the predicted rate of return by 20%. If the minimum rate were 5%, the fund's profits would be distributed as follows: The backers get 80%, and you get 20%. Setting up the fund's compliance, risk, and valuation requirements is essential.

Increase Your Revenue

The next stage is gathering the required documents, such as an offering memorandum, subscription agreement, partnership agreement, custody agreement, and due diligence questionnaires. Before starting the capital-raising procedure, marketing materials are also necessary. For new managers, it's crucial to ensure they receive a formal severance letter from their previous employer. Employees need to be able to brag about their prior successes and experience. Hence severance letters are essential.

This leads to the most challenging step in starting a private equity fund: attracting investors. Getting your money prepared for investment is the first step. Successful fund managers will probably be required to invest 2 to 5 percent of their wealth to the fund's total capital commitments. A 1%–2% allocation for their first fund is a decent place to start for new managers.


Private equity investments have grown faster than the U.S. market during the past 20 years. This has increased demand from investors looking for new chances to boost their earnings. Use the recommendations above as a road map to start a successful fund.

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