How to set up a private equity fund

Written by kelcey lehrich
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Private equity differs from public equity in that the ownership shares are not actively traded. Public companies trade their shares on stock exchanges such as the NYSE and NASDAQ. Private equity funds are investment partnerships constructed to acquire companies. Investments in private equity funds are said to be illiquid as the investment typically requires a time commitment of several years.

Skill level:
Easy

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Instructions

  1. 1

    Draft partnership documents. All private equity funds are legally structured as partnerships. The operators of the fund are referred to as general partners. Limited partners are the investors in the fund. A lawyer will need to draft the document to ensure it is structured correctly and most funds will need enough investors to start the fund with tens of millions of dollars in capital.

  2. 2

    Define the investment portfolio guidelines. All private equity funds have specific investment criteria. Some funds only buy companies in specific geographic regions while others only buy companies of a specific size or in a specific industry.

  3. 3

    Solicit investors for funds. Most private equity funds require a minimum investment of £162,500 or more. Private equity funds are typically offered only to accredited investors as defined by the Securities and Exchange Commission (SEC). A good network of contacts or list of wealthy investors will help here.

  4. 4

    Buy companies for your portfolio. The size and objective of the fund will determine the approach used to select companies for investment by the fund. Business attorneys, CPA firms, and business brokers are great resources for finding potential portfolio companies.

  5. 5

    Distribute earnings to your investors. All profits in a private equity fund are dispersed back to the investors providing the capital to run the fund. The better the returns you generate, the happier your investors will be. Most firms distribute earnings quarterly.

Tips and warnings

  • When soliciting investors to start your fund, consider contacting investment advisers that work with high net worth accredited investors to get leads.

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