Private equity funds have been a historically successful asset class and the field continues to grow as more private equity firms and portfolio managers join the industry. Many investment bankers have made the switch from public to private equity because the latter has significantly outperformed the 澳洲幸运5官方开奖结果体彩网:Standard & Poor's 500 Index over the last few decades, fueling greater demand for private equity funds from institutional and individual 澳洲幸运5官方开奖结果体彩网:accredited investors. As demand continu🦋es to swell for alternative investments in the private equity space, new managers will need to emerge and provide investors with new opportunities to generate alpha.

Today's many successful private equity firms include Blackstone Group, Apollo Global Management, TPG Capital, Goldman Sachs Capital Partners, and the Carlyle Group. However, most firms are small to midsize shops and can range from just two employees to several hundred workers. Here are several steps managers should follow to launch a private 澳洲幸运5官方开奖结果体彩网:equity fund.

Define the Business Strategy

First, outline your business strategy and differentiate your financial plan from those of competitors and benchmarks. Establishing a business strategy requires significant research into a defined market or individual sector. Some funds focus on energy development, while others may focus on early-stage biotech companies. Ultimat𝓡ely, investors♐ want to know more about your fund's goals.

As you articulate your 澳洲幸运5官方开奖结果体彩网:investment strategy, consider whether you will have a geographic focus. Will the fund focus on one region of the United States? Will it focus on an industry in a certain country? Or will it emphasize a specific strategy in similar emerging markets? Meanwhile, there are several business focuses you could adopt. Will your fund aim to improve your portfolio companies' operational or strategic focus, or will this center entirely on cleaning up their 澳洲幸运5官方开奖结果体彩网:balance sheets?

Remember, private equity typically hinges on investment in companies that are not traded on the public market. It's critical that you determine the purpose of each investment. For example, is the aim of the investment to grow capital for mergers and 澳洲幸运5官方开奖结果体彩网:acquisitions activity? Or is the goal to raise capital that wℱill allow existing owners to sell their posit🐼ions in the firm?

Business Plan, Operations Setup

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 澳洲幸运5官方开奖结果体彩网:portfolio investments. Each fund typically has a life of 10 years, although ultimately timelines are up to the manager's discretion. A sound business plan contains a strategy on how the fund will grow over time, a marketing plan to target futu𓆏re investors, and an executive summary, which ties all of these sections and goals toget🔯her.

Following the establishment of the business plan, set up an external team of consultants that includes independent accountants, attorneys and industry consultants who can provide insight into the industries of the companies in your portfolio. It's also wise to establish an 澳洲幸运5官方开奖结果体彩网:advisory board and explore disaster recovery strategies in case of cyberattacks, steep market downturns🍬, or other poꦆrtfolio-related threats to the individual fund.

Another important step is to establish a firm and fund name. Additionally, the manager must decide on the roles and titles of the firm's leaders, such as the role of partner or portfolio manager. From there, establish the management team, including the CEO, CFO, chief information security officer, and 澳洲幸运5官方开奖结果体彩网:chief compliance officer. First-time managers are more likely to raise more money if they are part of a team that 澳洲幸运5官方开奖结果体彩网:spins out of a previously successful firm.

On the back end, it's essential to establish in-house operations. These tasks include the rent or purchase office space, furniture, technology requirements, and hiring staff. There are several things to consider when hiring staff, such as 澳洲幸运5官方开奖结果体彩网:profit-sharing programs, bonus structures, compensation protocols, health ins🃏urance plans, and retir🐎ement plans.

Establish the Investment Vehicle

After early operations are in order, establish the fund’s legal structure. In the U.S., a fund typically assumes the structure of a 澳洲幸运5官方开奖结果体彩网:limited partnership or a limited liability firm. As a founder of the fund, you will be a gener🌊al partner, meaning that you will have the right to decide the investmenꦬts that compose the fund.

Your investors will be 澳洲幸运5官方开奖结果体彩网:limited partners who don't have the right to decide which companies are part of🐻 your fund. Limited partners ar꧑e only accountable for losses tied to their individual investment, while general partners handle any additional losses within the fund and liabilities to the broader market.

Ultimately, your lawyer will draft a 澳洲幸运5官方开奖结果体彩网:private placement memorandum and any other operating agreements such as a limited partnership agreement or 澳洲幸运5官方开奖结果体彩网:articles of association.

Determine a Fee Structure

The 澳洲幸运5官方开奖结果体彩网:fund manager should determine provisions related to management fees, carried interest and any hurdle rate for performance. Typically, private equity managers receive an annual 澳洲幸运5官方开奖结果体彩网:management fee of 2% of committed capital from investors. So, for every $10 million the fundraises from investors, the manager will collect $200,000 in management fees annuall🃏y. However, fund managers with less experience may receive a smaller m🐎anagement fee to attract new capital.

澳洲幸运5官方开奖结果体彩网:Carried interest is commonly set at 20% above an 澳洲幸运5官方开奖结果体彩网:expected return level. Should the 澳洲幸运5官方开奖结果体彩网:hurdle rate be 5% for the fund, you and your investors would split returns at a rate of 20 to🌳 80. During this period, it is also important to establish compliance, risk and valuation guidelines for the fund.

Raise Capital

Next, you will want to have your offering memorandum, 澳洲幸运5官方开奖结果体彩网:subscription agreement, partnership terms, 澳洲幸运5官方开奖结果体彩网:custodial agreement, and 澳洲幸运5官方开奖结果体彩网:due diligence questionnaires prepared. Al♚so, marketing material will be needed prior to the process of raisin✤g capital. New managers will also want to ensure that they have obtained a proper severance letter from previous employers. A severance letter is important because employees require permission to boast about their previous experience and track record.

All of this leads ultimately leads you to the biggest challenge of starting a private equity fund, which is convincing others to invest in your fund. Firstly, prepare to invest your own fund. Fund managers who had had success during their careers will likely be expected to provide at least 2% to 3% of their money to the fund's total 澳洲幸运5官方开奖结果体彩网:capital commitments. New managers with less capital can likely succeed with a commitment of 1% to 2% for their first fund.

In addition to your investment track record and investment strategy, your 澳洲幸运5官方开奖结果体彩网:marketing strategy will be central to raising capital. Due to regulations on who can invest and the unregistered nature of private e🐠quity investments, the government says that only institutional investors and accredited investors can provide capital🌠 to these funds.

Institutional investors include insurance firms, 澳洲幸运5官方开奖结果体彩网:sovereign wealth funds, financial institutions, 澳洲幸运5官方开奖结果体彩网:pension programs, and university endowments. Accredited investors are limited to individuals who meet a specified annual income threshold for two years or maintain a net worth (less the value of their primary residence) of $1 million or more. Additional criteria for other groups that represent accredited investors are discussed in the 澳洲幸运5官方开奖结果体彩网:Securities Act of 1933.

Once a prౠivate equity fund has been established, portfolio managers have the capacity to begin bu💙ilding their portfolio. At this point, managers will start to select the companies and assets that fit their investment strategy.

The Bottom Line 

Private equity investments have outperformed the broader U.S. markets over the last few decades. That has generated increased demand from investors seeking new ways to generate superior returns. T🐼he above steps can be used as a roadmap for establishing a successful fund.