How to Set Up a Private Equity Fund

How to Set Up a Private Equity Fund

Private equity funds have gained a reputation industry-wide as a dynamic, fast-paced arena where savvy fund managers score wealthy clients and hefty paychecks. It is not uncommon for private equity funds to use stock as a means to gain controlling interest in specific companies they acquire. For those who have a passion for this particular industry, setting up a private equity fund may not be out of the question. However, understanding the specific challenges and obstacles attached to this profession will help ensure that you have a realistic expectation for exactly what it takes to succeed in this highly competitive environment.


Starting a private equity firm requires a high degree of planning, foresight and research. Private equity fund startup costs will likely be quite high, making this a particularly difficult organization to build from the ground up.

Fundamentals of Private Equity Funds

Unlike hedge funds, the world of private equity is focused much less on short-term profits through the buying and selling of stock and other market assets. Private equity funds invest directly in companies, the vast majority of which are privately owned.

On the most fundamental level, private equity funds manage a pool of funds that have been invested by individuals seeking to generate a profitable return on their investment. These funds are overseen by the fund manager, an individual or group of individuals who are responsible for executing the strategy deployed by the fund. Given the fact that it is not uncommon for these funds to acquire and manage companies in their portfolio over the short-term, fund managers will typically employ a group of skilled corporate leaders and consultants who can help improve logistical workflow and ensure professional oversight.

Private Equity Fund Managers and Fees

The manager(s) of the fund generates their own salary through basic operational fees billed to clients as well as a fixed percentage of profits that the fund generates. The latter acts as a performance incentive, helping ensure that the fund continues to seek out the best possible growth opportunities.

The specific percentage of profits assigned to the manager, as well as the size of the operational fee, will vary considerably based on the fund in question. As could probably be expected, funds that have developed a reputation as a consistent "winner" in the industry will likely be able to demand increased fees. This is due to the fact that many investors will be willing to pay a premium to tap into the profits being generated.

Starting a Private Equity Firm

Perhaps not surprisingly, many of the initial steps you will need to take in order to ensure that your private equity fund launches smoothly are no different than the steps you would take to launch any other business. First and foremost, you will need to spend time creating a thorough, detailed business plan. Given the fact that you will be courting clients and investors throughout the lifespan of your fund, your business plan can help jump-start the flow of capital into your operations by demonstrating to clients that you have a clear and concise understanding of what is required to make your fund thrive.

As a general rule, your business plan should communicate a few critical points to prospective investors, one of the most important being exactly how you plan on generating profits, i.e., your investment strategy. Given the diverse array of opportunities present in the world of private equity investment, potential investors will likely be very keen on assessing your own take on the industry at large and the best ways to secure profits within it. With that in mind, this element of your business plan is as much an evaluation of your industry competency as it is an "elevator pitch" to win over new supporters.

Assemble Your Legal Foundation

No private equity firm can stand on its own without a powerful legal platform backing up its action. You should actively begin developing a team of legal professionals willing to work with you to ensure that any and all transactions that occur as part of your business are fully legitimate.

It is also important to mention that these lawyers will help ensure that your private equity fund does not run afoul of the myriad of legal regulations that surround this particular industry. These regulations relate not only to who you can accept money from as you grow your fund, but also how you can advertise, the paperwork you need to file, the fees you must pay and the tax laws you must adhere to, among many other layers of rules and codes.

This will likely be one of the most expensive elements of your foundational preparation. Private equity funds can generally expect to spend a substantial sum of money on legal support, potentially into the hundreds of thousands of dollars. Without this personnel, however, it is very likely that your fund will flounder before it even gets off the ground.

Raising Your Investment Funds

Once the architecture of your fund has been established, the next step will be to raise investment funds from your clients. As a private equity fund manager, you are legally allowed to accept funds from accredited investors only. By definition, an accredited investor is any individual who has had an annual income of over $200,000 for at least two years, or who has a personal net worth of, at minimum, $1 million. It is also important to note that you will be able to invest your own funds into your private equity fund even if you do not meet the standards required of third-party investors.

You can expect a long, arduous process when it comes to raising money for your fund. In fact, the process of fundraising will likely continue through the lifespan of your fund. Courting new clients is an integral element of this process that will significantly impact the flexibility and activity of your fund. Without access to needed funds, buying companies that are capable of turning immense profits may be out of reach.

Initiating Your Investment Strategy

With the funds you have raised, it is now time to effectively implement whatever investment strategy you have decided best matches your own skills, expertise and experience. On a fundamental level, however, you should be thoroughly prepared to deploy a leadership and managerial team that is fully capable of turning around distress companies and helping you secure a profit when it is time to sell.

This is not an investment strategy or profession that entertains "get-rich-quick" schemes. The world of private equity is inherently slow moving and relies on years of hard work and due diligence before profits can be secured. For those who are willing to put in the effort, however, the potential profits from a successful investment will more than justify the toil it took to get to that point.