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What to Consider When Raising Your Own Private Equity Fund?

Private equity funds are successful assets, having significantly outperformed over the last few years. Individual and institutional investors are increasingly showing interest in these funds. As the demand continues swelling in private equity funds, new managers tend to emerge and grab the opportunities. While planning to raise your own private equity fund, you would need private equity consulting from experts to lay out a strategy for assured success. They help you pick the right target sectors, make a business plan, set up the operations, and establish a fee structure for maximum returns.

Let’s discuss a few points to consider when raising your own private equity fund.

Business Strategy

Making a business strategy requires extensive research into the market or the particular sector. Some PE funds focus on early-stage companies, while others deal with expansion or late-stage firms. Ultimately, investors would want to understand your fund’s objectives. 

While articulating the investment strategy, consider whether you will focus on a particular geographical area, industry, or emerging market. Also, consider the ultimate fund aim, whether to improve strategic or operational focus or clean up the balance sheets.

Operational Setup

The business plan should calculate cashflow expectations, establish the fund’s timeline, and provide a clear exit plan. It should also include a growth strategy, marketing plan, and an executive summary over time. Once the business plan is ready, hire an external private equity consulting team to get insight into the industry. It’s also crucial to create an advisory board and articulate a disaster recovery strategy. 

The next step in the operational setup is to assign titles and roles to firm leaders and establish a management team. Establish in-house tasks like purchasing or renting an office space, IT equipment, staff, and furniture. Hiring staff incorporates several considerations like bonus structures, health insurance, retirement plans, profit-sharing, compensation, etc.

Investment Vehicle

A private equity fund usually assumes a limited partnership or limited liability firm’s structure in the US. As the fund’s founder, you are the general partner and decide the investments composing the fund. Investors are your limited partners who do not decide your fund’s companies. They are only accountable for the losses in their investment. You will need a lawyer to draft a memorandum and other agreements for your private equity fund.

Fee Structure

Determine provisions regarding management fees, performance hurdle rates, and carried interest. Typically, PE managers receive annual management fees, which is a certain percentage of the investors’ committed capital. Carried interest is a certain percentage above the expected returns level. It is also crucial to establish risk, valuation, and compliance strategies for the PE fund for such a period.

Capital

Before raising capital, you will need to offer a subscription agreement, custodial agreement, memorandum, questionnaires, marketing material, and partnership terms for investors. New managers will need a severance letter from the previous employers, which helps them boast of their previous track record and experience. Private equity consulting help with all these steps to start a PE fund and convince others to invest. 

After establishing a private equity fund, the portfolio managers may start building portfolio. Select assets and companies that fit your investment strategy and use new ways to obtain superior returns. Consulting firms provide deal sourcing, target evaluation, portfolio monitoring, exit support, and other services to help you make the right decisions while raising your own PE fund.

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