Are you interested in starting a private equity fund investment company? If YES, here is a complete guide to starting a private equity fund firm with no money and no experience.
Okay, so we have provided you an in-depth sample private equity firm business plan template. We also took it further by analyzing and drafting a sample private equity fund marketing plan backed up by actionable guerrilla marketing ideas for private equity firms. In this article, we will be considering all the requirements for starting a private equity investment firm. So put on your entrepreneurial hat and let’s proceed.
Table of Content
- 1 What is a Private Equity Firm?
- 2 Why Start a Private Equity Firm?
- 3 Starting a Private Equity Firm – Market Feasibility Research
- 4 Starting a Private Equity Firm – Legal Aspect
- 5 Writing a Business Plan for your Private Equity Firm
- 6 Detailed Cost Analysis for Starting a Private Equity Firm
- 7 Starting a Private Equity Firm – Technical and Manpower Requirements
- 8 Starting a Private Equity Firm – The Marketing Plan
- 9 Tips for Running a Private Equity Investment Firm Successfully
What is a Private Equity Firm?
Private equity business is a business firm consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies. The capital that is raised from investors, whether retail or institutional, can be used in a number of ways.
It is often used to invest in or to fund new technologies, expand working capital within an owned company, to make acquisitions or to strengthen a balance sheet. It is not unusual for large private equity transactions to take place
Why Start a Private Equity Firm?
Do you have a flair for investing? How about well-heeled connections? If so, then setting up a private equity firm can be lucrative, but a challenging endeavour. The term private equity funds refers to a pool of privately raised funds dedicated to buying significant stakes in companies as investments or to have input into the operation of the entities.
Private equity funds come in different flavours from venture capital funds, which focus on investing in early-stage companies, to leveraged buyout funds, which focus on buying large, established businesses. Whatever your particular interests, the steps to forming a private equity firm are similar but expensive. Here is a detailed plan as to how you can start a private equity firm.
Starting a Private Equity Fund Firm – A Complete Guide
- Industry Overview
This industry is composed of private equity firms, hedge firms, closed-end firms, unit investment businesses and other financial vehicles. Entities in this industry manage securities or other assets on behalf of shareholders, unit holders or other beneficiaries to achieve high returns on targeted investments. This industry excludes insurance and employee benefit firms, open-end investment firms and businesses, estates and agency franchise.
- Interesting Statistics About the Private Equity Fund Industry
The Private Equity, Hedge firms and Investment Vehicles industry continues to become an increasingly major part of institutional investor portfolios and a mainstream part of the asset management market. Increasing demand from institutional investors has contributed to the surge in industry assets under management and revenue over the past five years.
Over the next five years, institutional investors will continue to increase their allocations to alternative asset classes and strategies, while greater retail access to these same asset classes and strategies through ETFs and mutual funds will further drive up industry AUM and revenue.
Investors who put money into private equity funds and now have buyer’s remorse are selling their stakes in a growing secondary market, which is on pace for a record $40 billion in volume.
Starting a Private Equity Firm – Market Feasibility Research
- Demographics and Psychographics
Private equity refers to company ownership by a specialized investment firm. Typically, a private equity firm will establish a fund and use it to buy multiple businesses, with the goal of selling each one within a few years at a profit.
Private equity firms will often target an underperforming business and, after purchasing the company, use their management expertise to improve profitability. Private equity firms are continually searching for companies that are well-positioned to benefit from attractive industry trends, since it results in market growth and provides stronger equity return potential as well as stronger downside protection for the investment.
A crucial part of the investment process is the due diligence performed on the company. Think of it like an investigation process for a potential investment: PE firms will perform very detailed due diligence in order to ensure that they are making a sound investment. This process is crucial to the success of the investment, and the financial sponsor must look at all critical aspects of the target company: commercial, financial, and legal.
List of Niche ideas in the Private Equity Fund Industry
Private Equity firms can invest in a wide mix of private investment strategies, with the mix varying greatly from firm to firm depending on the firm’s size, stated investment strategy, and industry and transaction expertise. But focusing on a particular niche can create focus and foresight for your business.
- Private equity investment in healthcare
- Private equity investment in agriculture
- Private equity investment in shipping
- Private equity investment in airlines
- Private equity investment in science and technology
- Private equity investment in education
- Private equity investment in insurance
Level of Competition in the Private Equity Fund Industry
The Private Equity industry has become much more socially acceptable over the last decade. The public perception of private equity firms has improved for three primary reasons:
- Private Equity firms are making a conscious effort to invest in more socially responsible companies.
- Many prominent Private Equity deals in decades past, such as KKR’s acquisition of RJR Nabisco, are seen as displays of greed and exercises in hubris, while today, practically all Private Equity deals are executed with the sole intention of creating economic value for shareholders and the economy at large.
- The general public has begun to see how buyouts can play a beneficial role in improving companies and sustaining economic growth. Instead of being seen as an industry that focuses on making operations leaner through layoffs and restructuring, Private Equity firms are starting to be seen as being able to help sustain and build companies, as well as increase employment levels.
With the public perception about the private equity industry changing from good to bad, more individuals keep diving into the industry making it a well competitive industry.
List of Well Known Brands in the Private Equity Fund Industry
Private equity firms manage investment capital obtained from institutional investors or high net worth individuals (HNWI) to acquire equity ownership of companies through a variety of strategies, including leveraged buyouts and venture capital. Private equity firms operate with long-term investment horizons, typically five to seven years so making a name in this industry is not an overnight job but consistently.
- Apollo Global Management LLC
- Blackstone Group Lp
- Carlyle Group
- KKR & Company LP
- Ares management LP
- Oaktree Capital Management LP
- Fortress investment group LLC
- Bain Capital LLC
- TPG capital LP
All the financial vehicles in this industry pool together funds from different investors. These financial vehicles differ in investment styles and objectives, asset types, use of leverage and regulatory requirements. They are ranked by estimated assets under management (AUM) as a percentage of the whole alternative asset market.
Private equity firms have expanded over the past five years to represent an estimated 49.6% of total industry AUM. Private equity is expected to account for an even greater share of total industry revenue, mainly due to higher fees than those charged by hedge funds and declining popularity of other alternative asset vehicles in the aftermath of the subprime mortgage crisis.
Is a Private Equity Firm Worth Starting from Scratch or is Buying a Franchise Better?
The Private Equity industry has reached near universal agreement on the importance of building a strong brand, as an “active way to build external awareness and internal cohesion”. In order to be successful, private equity houses today devote resources to improve, strengthen and understand the perception of their brand in the market and make changes to their brand accordingly.
Brand awareness is the major benefit of buying a franchise and that is a lift to building a successful private equity firm business. A franchisor can also offer you Training, Access to advertising support, Signage and shop fittings, Equipment and access to operational intellectual property, Materials, supplies and stock, and Ongoing advice.
Possible Challenges and Threats of Starting a Private Equity Firm
Today, there are many successful private equity firms, including Blackstone Group, Apollo Management, TPG Capital, Goldman Sachs Capital Partners, and Carlyle Group; however, most firms are small to mid-size shops that can range from just two employees to several hundred workers. But starting a private equity firm business is not an easy job, challenges you may face include
- Defining your business strategy
- Setting Up the Business Plan and the Operations
- Establishing the investment vehicle
- Determining a Fee Structure
- Raising funds
Starting a Private Equity Firm – Legal Aspect
- Best legal entity for a private equity firm
In the United States, a private equity firm typically assumes the structure of a limited partnership or a limited liability firm. As a founder of the firm and fund, you will be a general partner, meaning that you will have the right to decide the investments that compose the fund. Your investors will be limited partners, who don’t have the right to decide which companies are parts of your firm.
Limited partners are 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, you will need a lawyer who will draft private placement memorandum and any other operating agreements such as a Limited Partnership Agreement or Articles of Association.
Catchy Business Name ideas for a Private Equity Firm
- Hogwarts holdings Capital LLC
- Citadel Partners LP
- Zeus Capital Partners LP
- Masters Advisors LLC
- Spring Holdings LP
- Cerberus Capital Management LLC
- Blue whale Asset Management LLC
- Access Investment Management LLC
- Shannon Funds LP
- Vernon Associates LLC
- Steel Securities LLC
- Knightsbridge Trust LP
- Sky bridge securities LP
- Honest Abe Advisors LLC
Choosing the Best Insurance Policy Needed for a Private Equity Firm
Recent global political and economic events have changed the landscape for private equity and venture capital firms. Increased litigation threats arising from portfolio company bankruptcies, dissatisfied investors, regulatory investigations and employment practices suits pose new levels of risk to private equity and venture capital firms, as well as the personal assets of their managers and employees. So indeed insurance is needed to be able to have our back when the wall of Jericho falls on you and your business.
- Errors and omissions insurance
- Property insurance
- Workers compensation insurance
- Business interruption insurance.
- Umbrella Policies
- General liability insurance
- Payment protection insurance
Getting Intellectual Property Protection and Trademark
If you are considering starting your own private equity business, then you should consider going for intellectual property protection to be able to protect your intellectual property. Filing for intellectual property protection for a private equity business goes beyond protecting your company’s logo and other documents, but also protecting your investments, patents and of course the name of your company.
If you want to file for intellectual property protection and also register your trademark in the United States, then you are expected to begin the process by filing an application with the USPTO. The final approval of your trademark is subjected to the review of attorneys as required by USPTO.
Is Professional Certification Needed to Start a Private Equity Firm
There are many options for advancing your career in private equity (PE), either through degree programs or certification training programs. The top private equity degree and certification programs have something in common:
They provide participants with many resources to understand the industry more in-depth, and they rely on a staff that is dedicated to serving its clients (you) and the staff or advisors have a background in the field. Few certifications in the private equity business include;
- Certified private equity professional (CPEP)
- Certified private equity specialist (CPES)
- The Chartered Financial Analyst (CFA)
- European Private Equity and Venture Capital Association (EVCA)
List of Legal Documents Needed to Start a Private Equity Firm
There are several documents, both legal and financial, needed for a private equity business. To avoid having problems even before starting the business you need to get all required documents but be rest assured that documents your private equity firm need may differ in each state or county.
- Business plan
- Business license
- Limited partnership agreement
- Article of agreement
- Memorandum of understanding
- Business Pitch Deck
- Capitalization table
- Convertible Promissory Note
- Corporate director agreement
- Corporate minutes
Writing a Business Plan for your Private Equity Firm
While writing your business plan, it should include a description of your business, its services and products and how the business will achieve its goals. The plan should include the overall budget, current and projected financing, a market analysis and its marketing strategy approach. In your business plan, you should project revenues and expenses for a certain period of time and describes operational activity and costs related to the business.
The idea behind putting together a business plan is to enable you to have a more defined picture of potential costs and drawbacks to certain business decisions and to help you modify accordingly before implementing these ideas.
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 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 future investors, and an executive summary, which ties all of these sections and goals together.
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 advisory board and explore disaster recovery strategies in case of cyber attacks, steep market downturns, or other portfolio related threats to the individual fund.
Detailed Cost Analysis for Starting a Private Equity Firm
The private equity industry is a very complicated and expensive industry where the exact amount needed to start a private equity business cannot be ascertained. In your private equity business you need access to the capital of course, but after that it is a lot like any other service business. You should figure out whether you have sufficient capital for whatever niche you are planning.
You need at least $5 million, but there is probably a critical amount you will need to be successful in different niches. A good start would be to acquire the private equity compensation report: Private Equity Compensation. There are detailed charts on each type of investing firm.
Your biggest expense if you want to come out of the gate with a full on company will be cash flow to pay wages during your start up months. Small firms are considered 1 – 5 persons and these are declining in number according to the 2015 report. Per employee earnings of small firms is also less according to the report. My intuition is that the big firms are buying up the successful small ones.
Add at least one month’s salary for each person to your start up costs. If your investment strategy is more long term then you might need more time before you start bringing in any real money. It is advised you start the firm with only one person, you, and a part time accountant and then add more personnel as the business and demands grew.
Other things which you will need in other to start a private equity includes A decent attorney who works for a fair price, A corporate Entity, A really good accounting system and somebody to manage it, Insurance, and A decent web site.
It takes time to set all this up – give yourself at least 6 weeks before you start taking in clients or investing your funds. That time should be added to the start up cost. Your accountant will need at least a week to get familiar with you and to set up your books. Your lawyer, analyst, and whoever else you are bringing into the company will also need some time to start.
Financing your Private Equity Investment Firm
Finance is very important for business organization. Finance includes planning of financial resources, making of optimum capital structure and effective utilization of financial resources by deep analysis of cost of capital and capital budgeting tool.
It is very advance technology. Like other technology, it can also increase the efficiency of business, so effective utilization with reasonable care is very necessary in Finance. Without Finance, doing business can become dangerous for company.
Private equity is a way of financing other business, but ways to finance a machinery that finances other businesses include;
- Debt Financing
- Personal savings
- Raising money from investors and business partners
- Applying for loan from your bank / banks
- Pitching your business idea and applying for business grants and seed funding from donor organizations and angel investors
Choosing the Best Location your Private Equity Firm
The commercial building you choose will have a big impact on your business. Its size, layout, location and appearance should all enhance your operations while respecting zoning and environmental regulations.
Buildings come in a wide variety of shapes, locations and prices, so you have to know what your needs are and how much you can afford to pay. If you’ve worked on a business plan, you probably know the amount you can spend on rent or a mortgage, utilities and taxes. A cash-flow analysis will help you determine whether you can afford to purchase a commercial property or if renting is your only viable option.
Renting may allow you to keep more of your working capital for business operations. Still, don’t forget to take future rent increases into account. When you own your property, you know what your monthly mortgage payments will be and you are building equity for your business.
It’s always a good idea to seek the advice of an independent commercial real estate advisor who can help you set criteria for choosing the right building. This advisor should know the area and be familiar with zoning regulations and any potential issues concerning the building, its location or uses to which it may be put.
Things to consider when choosing a suitable location for your private equity business include;
- If it’s the right location
- Does it require modification?
- Tax and infrastructure
- Allowing for future growth
- Separate your needs from your wants
Starting a Private Equity Firm – Technical and Manpower Requirements
Private equity is capital invested in private non-public companies that offer superior long-term return on investment. Investors include high-net-worth individuals, pension funds, charitable endowments and sovereign wealth funds. Private equity funds are often structured as limited partnerships, with partners taking an active role in the operations of portfolio companies. Successful private equity firms need a combination of technical and people skills.
Private equity firm management requires financial skills, such as analyzing financial statements and estimating the value of private companies. This can be a difficult process because private companies are not required to disclose their financial results. You need to understand contract law, because you will be involved in structuring potentially complex deals, including doing the necessary due diligence. An instinctive feel for, or direct experience in, different industries is also a useful skill, because private equity firms usually invest in companies across different industry sectors.
Private equity investors need negotiation and networking skills. You need to meet and speak with investment bankers, venture capital investors and other market participants to generate leads for possible deals. You must establish a certain level of trust with business owners and executives because you will need to work with them before and after closing transactions.
You need negotiation skills because you have to convince business owners that your private equity firm can enhance shareholder value, while preserving organizational values and culture to an extent possible. You may also have to negotiate with other institutional investors to put together the financing for large deals. You may need to negotiate with labour unions to implement cost-saving measures to increase the earnings and cash flows of your portfolio companies.
Private equity investors take a hands-on approach in board governance and operational management. This approach is required to turn around financially distressed or undervalued companies and maximize shareholder value. Senior associates and managing directors take on board and senior executive management roles. They review periodic earnings reports, implement operational restructuring measures and get involved in long-term strategic planning.
Successful private equity investing requires certain other intangible people skills. You need to empathize with owners, who have built their companies their entire lives, and with employees concerned about their livelihood. You must know when to hold onto an investment and when to cut your losses. Most importantly, you need to take a long-term view, because it takes time to turn around and realize the true value of certain investments.
The Service Delivery Process Involved in Running a Private equity firm
The typical process for evaluating and completing a new private equity investment opportunity has many different and structured steps that can vary widely by Private Equity firm, and can differ greatly due to specifics of the target company or the transaction process. The initial investment evaluation can happen very quickly, but the entire process may take several months or even a year or more.
The discovery and assessment of the opportunity at the beginning of the process is called “sourcing”—in this phase, the firm locates potential targets and looks at the viability of the investment and the potential returns available. Then, as more information is gathered, the firm conducts due diligence, creates and develops very detailed financial models, and evaluates the pros and cons of the opportunity prior to final approval and execution of the transaction.
Even though the general aspects of the process are the same across various firms, the details can vary widely depending on how the investment opportunity was sourced (proprietary sourced vs. public auction) and each firm’s investment committee process. The larger the firm, the more formalized the investment committee process will be and the higher the probability that public auctions will be used.
Conversely, growth equity firms tend to work on more proprietary-sourced deals where they have less competition and are dealing more directly with management. Growth equity firms also have less formalized investment committee processes because there are typically fewer partners in the firm, thereby requiring less work to build consensus among the partners before the investment can be made.
Once a private equity firm has officially signed a deal with the target company, both parties will jointly issue a press release announcing the transaction. From there, both parties will work toward closing the transaction, which can take from a few months to a year to complete, depending on the size and complexity of the transaction. At this point, the seller’s investment bankers will become less involved, and the main interactions will be between the lawyers representing the buyer and seller.
Starting a Private Equity Firm – The Marketing Plan
- Marketing strategies for a private equity firm
Private Equity Marketing has been around since the practice began, but today Digital Marketing is an essential key to success. It is easier than ever to track targets, message to them more effectively and condition those targets to be more receptive to your requests. The tools to effectively market your private equity firms include:
- Problem Solving
Strong problem solving skills are a necessary component to effectively market private equity firms, especially when employing digital tactics.
Creativity has always been an essential component of any good marketing program, but a unique creative set that includes intelligent concepts is a winning combination.
Intelligence is the one thing that most marketing agencies lack. Intelligent marketers are a must when marketing private equity firms.
Getting the Right Pricing for your Private Equity Investment Services
Due to the specialized expertise of private equity firms, they are able to charge fees to their limited partners when managing their investments. They do so through two primary sets of fees: annual management fees across total assets under management (AUM), and a performance incentive fee based on a hurdle rate. While this varies by firm and possibly by fund, typical management fees consist of 2% of the total assets under management annually, and performance fees of 20%, which are taken from exited (“realized”) investments.
A Private Equity firm’s performance fees are also called incentive fees, carried interest or carry. There is typically a hurdle rate (an annual required return of 7-10%) that general partners must achieve before performance fees are allowed to be taken.
The structure of these performance fees motivates the partners of private equity firms to generate large returns; they are intended to align the interests of the general partner with the limited partners. Hurdle rates force Private Equity firms to strive for generating above-market returns, since they stand to earn a large amount of money from the share of profits made on successful investments beyond the hurdle rate of return.
Possible Ways for Winning Competitors in the Private Equity Fund Industry
Of course, competition isn’t all good. While using the presence of threatening rivals to focus and motivate employees, you also have to make sure your competitors aren’t going to steal your customers. Meanwhile, you’ll be doing everything you can to grab sales from your rivals. Step one in both of these processes is to identify and know your competitors.
It will be challenging competing as a newcomer in the private equity industry especially in a highly organized market like that of the United States of America, which is why you must be deliberate in choosing your board members and your core management team.
In the private equity business, with adequate tools and consistent workers, you need not worry about competitors but how to improve your marketing skills. Being focused, articulate and well mannered can be all you need to be able to overtake your competitors in the private equity business.
Lastly, always ensure that your organization is well positioned and if possible form strategic partnership with other key stakeholders in the private equity industry; it will sure give you competitive advantage over your competitions.
Increase Client Retention in your Private Equity Firm
When it comes to business no matter the industry you choose to jump into, one of the easiest ways to increase customers’ retention and perhaps to attract new customers is to satisfy your customers always. If your customers cum clients are satisfied with the turnouts you can achieve with their investments, they can hardly source for alternative service provider or products.
Statistics has it that one of the major reasons why customer’s source for alternative service provider or product is when there is a drop in quality. Another reason is poor customer service. If you can continue to improve on the quality or your services and make your clients feel the aura that they are safe, then you won’t struggle to maintain your loyal customers.
Part of what you need to do to achieve this is to track progress, results or outputs with the aim of improving on them quickly as the case demands. When it comes to managing your customers and building loyal clientele base, you should always listen to them and take their complaints seriously. Make them feel that their notions are being looked into because no one would want his/her incentives to be played with. Also try to give you clients what your competitors can’t offer them.
Strategies to Boost Brand Awareness and Create a Corporate identity for your Private Equity Firm
In the past Private Equity firms had the option of worrying about their brand or not. Communication took place in an organic way through partner networks and personal connections. Results produced by the Private Equity firm could stand on their own, demonstrating the value and strength of a firm.
Today this is slowly fading away. A Private Equity firm is now virtually required to participate in building and growing its brand. From the Name, Logo and Colours to the Voice of the firm and what sets it apart, all of these things are becoming more and more important to potential investors and business targets (not to mention consumers who voice their opinions about firms).
- Build an image and promote the brand
- Tell your story and stay consistent
- Define your offering
Creating a Supplier/Distribution Network for a Private Equity Firm
A Private Equity firm sustains itself through a continuous cycle of raising capital. As Private Equity firms grow their capital base from funds, they are able to grow the firms, as a result of the increased fees received for managing the investments in the various funds they are managing. Conversely, if a Private Equity firm does not have a strong investment track record, it may be forced to unwind its operations if it is unable to raise additional capital by raising new investment funds.
In order to amplify returns, private equity firms typically raise a significant amount of debt to purchase the assets they invest in, in order to minimize their initial equity requirement (i.e. they use leverage). This investment strategy has helped coin the term “Leveraged Buyout” (LBO). LBOs are the primary investment strategy type of most Private Equity firms.
Tips for Running a Private Equity Investment Firm Successfully
Private equity firms invest money in companies and attempt to make those companies more profitable. If the private equity firm is successful, it makes money, usually by taking the company public or selling it to another company. Private equity firms often receive criticism over the fact one method they sometimes use to make companies more profitable is cutting expenses by eliminating jobs.
However, the most reputable private equity firms create more net jobs than they eliminate; they do so by restoring struggling companies to positions where they can expand and hire. Running a private equity firms cannot be an easy task but nothing good comes easy. In other to run your business successfully, you need to bear the facts listed below in mind.
- Lead with real leaders
- Think ‘full potential’ and a three to five year timeline
- Work the balance sheet
- Measure less
- Make the centre the shareholder, not the stock market
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