How to Start a Private Equity Fund | Fund Launch

How to Start a Private Equity Fund: The Ultimate Guide

I've started this article with something a bit different to share. I'm sure you know that the three-piece suit corporate and legal world will have you believe you need to pay tens of thousands in fund creation fees before you can tell anyone about your opportunity.   

That's both true and not true.

Would any successful company spend a lot of money before ever testing what their prospects think about their product or service?

Of course not! 

My suggestion comes from years of assisting hundreds of individuals in launching their dream fund.

Before you fork over $50,000 or more in legal fees, STOP and test your fund concept. Are you thinking, "Whoa, I don't want to get into trouble?" Well, be sure to follow the law and do this right. 

Have you ever had someone ask to run an investment idea past you for your opinion? I'm sure you have. 

You can do the same type of research with any accredited investor. Most people are happy to share their opinions, which is invaluable in marketing research. Now, you will know if your fund investment model is on point or needs adjustments.

So, how do you keep everything on the straight and narrow?  

You make it clear to anyone you talk to that you CANNOT and WILL NOT accept any money until after your fund has launched. When several accredited investors have given you the thumbs up, put them on your priority list. Now, you will feel more confident paying the legal and filing fees. When your attorney gives you the green light to launch, you already have accredited investors ready. 

=> Now, if dropping tens of thousands in legal setup fees before you can accept a single penny makes you feel somewhat nauseous, relax—we can save you a ton of money on the legal fees, too!

At Fund Launch, we not only have real-world experience from creating our successful funds, but 900+ fund managers with $2.8 billion AUM have chosen us as their consultants to help them reach the next level. 

Here's some good news. You don't need an Ivy League degree or need to spend years slaving away in the pits of Wall Street to be able to launch your dream. In the last three years alone, we have worked shoulder to shoulder with individuals like yourself, launching 300 new funds. 

www.fundlaunch.com

OK, let’s dive into this article.

Key Characteristics of a Private Equity Fund

Starting with the definition.

Private equity funds are investment platforms that gather financial resources from multiple qualified investors to obtain controlling interests or full ownership in private companies and startup businesses. This strategy allows the fund to invest in new business ventures while actively participating in their development toward success.

Portfolio companies benefit from the efforts of experienced professionals who deliver essential support and services that improve performance and increase valuations. The main objective remains to sell these companies directly or launch them as public entities to generate significant returns for investors.

Private equity funds usually operate as limited partnerships with a maturity of 10-12 years. Limited partnership agreements (LPAs) frequently include provisions that enable extensions for pursuing longer-term strategies.

The investing capital comes from the limited partners (LPs). Each limited partner's financial exposure is capped at the amount invested. This limited liability is because the LPs do not participate in the fund's daily management or key decision-making activities.

Private equity funds require extended investment periods of 10 to 12 years. This lengthy investment period reflects the necessary efforts to improve the value of portfolio companies before achieving successful investment exits. Investors must understand that their capital will remain locked in the fund until it completes all its exit strategies.

These funds' substantial capital requirements and risks mean only institutional investors and high-net-worth individuals can participate. The exclusivity of private equity funds ensures that only qualified participants who can absorb risks and recognize the extended duration of these investments can access these opportunities.

Fee Structure 

A private equity fund receives two types of compensation called the "2 and 20." Here is how this works. Investors pay a 2% annual management fee based on their invested capital. This money covers the fund's day-to-day operating expenses, including salaries for the fund management team. 

The hurdle rate protects the limited partner's financial interests. This legal clause in the limited partner's agreement (LPA) ensures a first-money-in payout of earned profits up to a specified amount. Once the hurdle rate has been met, the general partner is rewarded for a job well done by receiving 20% of the earnings over and above the hurdle rate, which is referred to as carried interest.

Step One: How to Start a Private Equity Fund

Private equity funds typically target high-growth industries since these offer the potential to achieve maximum returns. Sectors historically attracting significant investment include: 

Technology

Tech innovations continue to explode, in large part due to artificial intelligence. The government and the private sector are showing solid support for these innovations, with many tech sources announcing to hold on tight because we haven't seen anything yet.

Healthcare 

The healthcare industry continues to expand. Over 10,000 baby boomers reach retirement age every day. Add to this the estimated 96 million people who are prediabetic, and this industry just keeps growing.

Renewable Energy 

This niche benefits from the global impact of a warming climate. Innovations in solar, wind, geothermal, and wave energy technologies continue to benefit from public and regulatory support. 

Financial Services 

The significance of Fintech continues to impact the economy. New solutions for online businesses continue to transform established banking and payment systems.

Consumer Goods and Services 

We have become a point, click, and buy society. Companies that double down on making the online buying experience seamless and straightforward will continue to grow. Brick-and-mortar businesses must either innovate or face extinction.

Team Members’ Experience and Skills

The work experience of the General Partner and the management team largely determines the sector a fund specializes in. When starting, potential investors recognize that a skilled management team with experience and adaptability is critical in continued growth and overcoming business obstacles.

Portfolio managers select companies demonstrating scalability, market expansion potential, or innovative offerings. A company's ability to sustain and grow its market position relies on thorough market share analysis, brand strength examination, and barrier-to-entry evaluation. 

Solid balance sheets and consistent cash flows, combined with manageable debt and profitability, indicate that a company has both stability and the potential to generate returns. The investment approach sets straightforward paths to monetization through sales growth, IPOs, and strategic mergers. 

Deep research uncovers prime investment opportunities and produces essential data for creating investor-focused presentation materials. Believing that your fund and its investment opportunities justify the investment is critical. 

Here is something to consider: 

Your presentation should remain focused and no more than 20 minutes.. 

Avoid including excessive facts and figures that could confuse your audience. Potential investors process information according to their comfort level. Some investors will immediately pull the trigger if they see value in your investment model and management experience. On the other hand, you may hear the “I need to sleep on it ” comment. 

This doesn’t mean they aren’t interested; they just need more time and information to decide. Do not ignore these more methodical individuals. Have a detailed information package ready so you can email it and let them know you follow up after several days.

Step 2: Develop a Business Plan

The fund business plan is a crucial roadmap for outlining the fund's strategic direction. This document details the investment approach and target industries, ensuring that all Limited Partners know the fund's objectives and goals. It includes an in-depth overview of how the fund plans to generate returns and highlights the management team’s expertise.

Within the plan, you’ll include financial forecasts, fundraising objectives, and a clear delineation of both short-term and long-term goals. This comprehensive analysis identifies potential risks and explains the proactive steps you will take to mitigate those risks and quickly adapt to economic fluctuations.

Additionally, the plan discusses key performance indicators (KPIs) to track progress and evaluate success, allowing for strategic adjustments as needed. A well-crafted business plan is essential for fundraising efforts, as it builds trust with potential investors. Investors need a clear strategy, realistic financial projections, and a reliable operational system to feel confident in their investment.

In essence, a robust business plan is fundamental for private equity funds. The plan should aim for sustainable success by focusing on measurable outcomes and demonstrating significant investment value to attract investor support.

Key Sections of Your Fund’s Business Plan

Executive Summary 

This section details the fund’s main objectives, investment approach, and core value proposition. The summary provides essential details about the fund's objectives while revealing the strategic priorities and intended results to decision-makers and prospective investors.

Investment Strategy 

It's super important that you clearly explain the fund's investment philosophy by detailing target sectors, deal types like buyouts and venture capital, transaction sizes, value creation methods, risk evaluation processes, and preferred exit strategies. The document establishes investment selection criteria and explains how to generate returns for investors.

Market Analysis 

The analysis examines niche market dynamics through a future-oriented evaluation, examining industry patterns alongside existing economic factors. The document educates potential investors about the fund's investment model, which targets companies with realistic growth potential.

Operational Plan

The fund’s organizational structure includes management team responsibilities and qualifications, governance systems, internal investment sourcing and evaluation processes, and management functions. The document outlines expansion plans for the team and operational support necessities to achieve the fund's strategy.

Understanding Investor Criteria 

Accredited Investors:

People qualify to invest if they have over $1 million in net worth, excluding their primary home, or earn annual income above $200,000 ($300,000 when married) during the last two years and can reasonably expect to maintain that income level.

Qualified Purchasers: 

Entities or individuals who hold more than $5 million in investments aside from their main home or business property, family offices that possess at least $5 million in assets, and investment managers who oversee $25 million or are considered qualified purchasers.

Testing Your Fund Concept

Remember what I said in the introduction to his article? Don’t shell out buckets of your hard-earned cash until you know your fund concept is on point by running it past some sophisticated investors. Then, if the response is solid, you will be much more comfortable paying the legal and regulatory filing fees.

=> A huge time-saving benefit of joining Fund Launch is our one-on-one assistance in creating a laser-focused presentation and marketing materials.

Create a Fundraising Strategy - 7 Steps

Usually, our members’ first question is: How can I identify and connect with accredited investors and qualified purchasers?

1. Tap into Your Established Network

Contact your business associates and industry connections to ask for introductions to accredited investors and qualified purchasers. An introduction from someone trusted and well-connected significantly increases the possibility of meaningful investor engagement. Be sure to reciprocate so it is mutually beneficial.

2. Attend Industry Events and Networking Forums 

Participate in conferences in your industry and attend investment summits and private capital expos. Developing relationships through face-to-face investor meetings at physical and virtual events creates strong pathways for connection.

3. Join Professional Organizations and Associations 

Focus your efforts on professional groups that match your business industry sector. The composition of these groups includes accredited investors and qualified purchasers who actively seek new investment opportunities.

4. Utilize Online Investment Platforms and Communities

Post your investment fund or opportunity on platforms where accredited investors gather and invest, including AngelList, Gust, OurCrowd, FundersClub, and SeedInvest. You can gain recognition as a dependable fund manager by sharing your insights and engaging in discussions within online investment communities.

5. Create a Strong Online Presence

Maintain active professional web pages while developing robust LinkedIn social media profiles. Build connections with potential investors by distributing thought leadership content alongside industry updates and success stories. Building trust with potential investors requires involvement in appropriate online groups and forums where your meaningful insights can be shared.

6. Work with Professional Lead Generation Services

These experts find suitable investors through prospect identification followed by essential pre-introduction evaluations.

7. Investor Ambassadors

Create an ambassador program and invite your limited partners to join. The best marketing strategy is a warm referral from a happy fund investor.

Maintaining Long-Term Investor Relationships

Focus on building long-lasting relationships rather than short-term transactional interactions. Investor trust builds when you maintain consistent updates and honest communication and demonstrate your professional expertise.

Existing investors represent your most valuable source for warm referrals. The traditional saying states that birds of a feather stick together. In plain language, people with similar wealth tend to participate in activities like country club membership, car collecting, support for local charities, wine tours, art galleries, symphony performances (you get the picture, right?).

Communicate - Communicate - Communicate

Provide transparent and efficient responses to investor questions about your fund and strategy. Tailor your message to your investor's financial objectives to demonstrate how your investment opportunity fits their goals. Please don’t fall into the time trap; I will get back to them later. A prompt response proves that you value the investor and their questions, which edifies them. 

Prioritize establishing enduring relationships instead of one-off transactions. Investor trust grows when you deliver consistent updates while maintaining honest communication and showcasing your professional expertise. Never forget that your existing investors are also your most valuable referral resource. 

Everything Comes Down to Your Launch Promotion

A steak house in Amarillo, Texas, has become famous for its eating challenge. It states that if a person can eat an entire 72-oz (6 lb) Porterhouse Steak with all the sides within one hour, it's FREE.

Of course, each person has to pay the $72 fee before trying.

The last time I checked, 94,705 people had tried.

With 10,413 successful (groaning) people, claiming the trophy. 

Over the years, this restaurant has earned millions by capitalizing on people’s desire to compete and win. They have accomplished this while countless thousands of restaurants have closed their doors.

What do I want to emphaszie in this example?

Weak marketing equals a lackluster fund.

Laser-focused marketing is critical to your fund's success. That's why the individuals who decide to become Fund Launch Black Card members receive one-on-one support to create their personal story and fund vision and bring that to life with stunning presentation materials.

Here is why you can trust the information in this article

Fund Launch is the #1 provider helping fund managers, investors, & entrepreneurs to build, launch, and scale their funds without needing a fancy Ivy League degree or working on Wall Street for 20+ years.
At Fund Launch©, we have years of real-world experience and have developed a templated process that will save buckets of money and shortcut you to that exciting day when you roll out your fund. Over 900 fund managers have chosen Fund Launch© to hone their skills and get themselves to market fast. 

Here are some resources from Fund Launch© that can help you build that solid foundation and launch you to market much quicker.

Please accept my invitation to take advantage of these FREE fund manager training resources by visiting: https://www.fundlaunch.com/training

3-day Challenge: 

An introductory program that teaches the strategies that billion-dollar portfolio managers use to find capital and structure deals.

Our Exclusive Black Card Membership: 

We have an exclusive fund incubator program for action takers that provides high-level mentorship and resources for aspiring fund managers aiming to scale their funds. 

We guide every fund through our tried and tested 4-phase Fund Launch Incubator - designed to help you craft a fund strategy that stands out.

New to 2025: Asset class specific tracks for Real Estate, Venture Capital, Private Equity, Debt, & Hedge Funds. 

• 4 Phase Curriculum
• Meet 1-1 with various advisors
• Asset Class Tracks (Real Estate, VC, Private Equity, Hedge Funds, & Debt)
• Dedicated account manager
• Office hours 6 days/week
• Fund Academy course, 200+ videos
• Regular group coaching sessions
• Fund/Syndication Legal Work
• Works for: Funds & Syndications

‍NOTE: If you are on a tight timeline and need to cut to the chase, you can schedule a one-on-one call here:  https://www.fundlaunch.com/call