Do you want to start a private equity real estate fund? If YES, here is a complete guide to starting a private equity real estate fund business with NO money and no experience. The private equity firm is one that has become quite popular and lucrative as there has been a high demand for private equity funds from accredited investors that are either individuals or institutions.
Therefore, if you are looking to become one of those enterprising entrepreneurs who intend to make it big in the industry, then you should ensure that you start with having a business strategy and as well state what your financial goals are, and have it differentiated from those of your competitors. Before you can draw up your business strategy, you would need to conduct a thorough market research so that you will be able to articulate your investment strategies to your potential investors.
The next step is to write out a business plan for your private equity fund. Your business plan should calculate the cash flow you expect from running the business and tell what period you intend to raise capital and the equity fund’s timeline. Your business plan should also detail how you intend to grow the funds that will be invested in your business and what marketing plans you have put in place to attract the needed investors to your business.
The private equity fund business is one that has a lot of legal and regulatory requirements, such as how you can advertise your funds and whom you will be able to accept money from during the investment period as the government has stated that only accredited investors and institutional investors can provide the capital needed.
There are also several fees as well as mandatory filings that you would need to take care of and this therefore means that you would need to hire a lot of legal attorneys and accountants with experience in this industry. Other activities that you would need to carry out include setting up your back office operations as well as engaging in several documentations processes and procedures.
Determining your fee structure is very important as you would need to determine details relating to management fees, hurdle rate for performance as well as carried interest. There are a lot of factors that you would need to take into consideration before fine tuning the details that would determine your fee structure.
Once you have determined this, you would need to raise capital with which to run your business. Unlike other forms of businesses, there will be a lot required from you in order to be able to raise the funds that you would need for your business and one of them is marketing collateral.
Finally, you would need to create the right strategies that would allow you attract investors to invest in your fund. Before this can be done, you would need to invest in your own fund before you can convince investors about the need to invest in your fund.
Also, investors will expect to see your track record, investment and marketing strategy. Once all the hurdles have been overcome, portfolio managers can then begin to build their portfolios, and in order to do this, they will have to make a selection of the companies as well as the assets that will be the best fit their investment strategy.
17 Steps to Starting a Private Equity Real Estate Fund Firm
1. Understand the Industry
The private equity industry in the united states of America between the periods of 2005 and 2007 made more than 7,500 deals resulting in a near .1 trillion value for that time period. However, this dropped between the periods of 2008 to 2010, as they were more than 5,000 deals that were worth only $408 billion from these time periods, thereby showing a 62 percent drop in the capital employed.
However as the economy began to improve, buyouts in the private equity industry began to slowly return and by 2012, the deals began to boom again in billions even though revenue could in no way be compared to that of the 2005 and 2007 time periods.
Fundraising in this industry had become more difficult especially after the recession of 2008, and this is due to the fact that investors have less capital with which to invest in private equity funds. Also, another challenge facing the industry were from the fact that private equity firms were finding it hard to generate consistent returns for investors.
Also, most of the revenue that was generated during the boom years (2005 to 2007) has not still yet been used for buyouts. This hang in capital is preventing more investors from committing their funds to new private equity funds even though the industry has become more socially accepted in the last decade.
The private equity fund industry is a fragmented market and there are therefore no companies holding a dominant market share in the industry. The industry generates about $184 billion annually and has a 5.7 percent growth between the periods of 2012 to 2017.
There are more than 18,000 private equity fund firms in addition to hedge funds and investment vehicles in the United States of America. These firms have employed more than 57,000 people that have been able to grow the industry due to the increase in demand from institutional investors. Also, investors have taken funds that are started by larger and well established private equity firms as something that has less risk.
The private equity fund industry is one that has increasingly become a significant part of the portfolios of institutional investors and also a major part of the asset management market. The industry assets under management and revenue has witnessed a significant increase over the period of 2007 to 2012 as there has been more demand increase from institutional investors.
The next five years (2012 to 2017) will see institutional investors continue to increase their allocations to alternative strategies and asset classes. There will also be a greater retail access to the same strategies and asset classes through mutual funds and equity trust funds.
The major operating regions for this industry are the Mid-Atlantic, West, Southwest as well as the Southeast regions. More than 22 percent of the industry funds are from the Mid-Atlantic region. Most of the large percentage of funds in these regions can be traced to high concentrations in New York and Delaware.
The reason why New York has such a high share of the funds is due to the closeness to major institutional clients as well as other investors. Also New York is home to the financial community and key brokers and also has the largest and the most liquid securities and commodity exchanges in the world.
2016 was a fast growing one for private equity firms globally, as the capital that was committed to traditional funds, separate accounts, direct deals and co-investments got to an all-time high of $681 billion annually beating the previous year’s record by more than 9 percent.
However, 2017 looks to be equally better for private equity firms as new investors entering into the assets class category are looking to make the industry set new records, even as old time participants are looking to further increase their allocations. Managers and investors have also started becoming more flexible and open-minded in negotiating the complex asset category.
Despite the fact that there might be hikes in 2017 especially in the United States, interest rates are likely to remain below the level it was in the years before the financial crises. Due to the concerns by the unpredictable terrain of the stock market, more investors are slowly turning to private equity firms especially as there is the promise of long-term returns that are in double digits.
Also, current private equity investors who find the potential 70 percent returns from private equity funds as too alluring have been increasing their exposure. In the long term, it is predicted that the assets for private equity firms could over the next 35 years amount to $15 trillion in value.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
The demographic and psychographic composition of those who invest in private equity funds are institutional investors which include insurance firms, financial institutions, sovereign wealth funds, pension programs as well as university endowments; and accredited investors which are high net-worth individuals who not only meet but maintain a specified income threshold for at least two years or have a net worth of $1 million or more.
Therefore, if you are looking to define the demographics for your private equity fund business, it should be in line with the government regulations on those eligible to provide capital for the funds.
3. Decide Which Niche to Concentrate On
Private equity funds usually manage securities or other class assets on behalf of unit holders, shareholders or other beneficiaries in order to help attain high returns on targeted investments. Those that invest in a private equity funds are usually perceived to be institutional investors and high net worth individuals who are under those allowed by the government to invest in this kind of industries.
Due to the high revenue generated by this industry, more operators are coming into the industry which has led to the need for those coming in or those already in the industry to engage in niche services that will enable them stand out from others in the same industry.
Some of the niche or major areas where a private equity fund firm might choose to engage in are;
- Private Equity Funds
- Hedge Funds
- Closed-end Funds
- Unit Investment Trust Funds
- Mortgage Real Estate Investment Trusts
The Level of Competition in the Industry
The level of competition in the private equity fund industry depends in a way on where the business is located. Even though a private equity fund business can operate from any part of the country and still compete effectively, those that are close to key investors and financial institutions are likely to have an edge over those that are far away.
When it comes to private equity funds, distance can sometimes be a barrier except for international clients. What most clients want from the private equity funds they invest in are that the investment should mature at the rate promised and should be paid when due.
Clients expect their portfolio managers to not only be transparent as regards the funds but to show a serious commitment as regards how the funds are being used. Also, most clients will prefer to go to private equity fund firms that have a good track record and deliver excellent services.
There are a lot of private equity fund firms in the United States of America and so if you are looking to start your own private equity fund, you should be prepared to meet with stiff competition, not only in your region but all around the country. Those that determine trends in the industry are usually large scale private equity funds and so these are where most of the stiff competition will most likely come from.
4. Know Your Major Competitors in the Industry
Even though the private equity fund industry is one that has experienced a lot of ups and downs and is also highly fragmented, there are still brands that stand out from others and this might be due to how well they have handled their portfolios, the size of their capital as well as their length of time in the industry.
Below therefore, are some of the well-known private equity fund firms in the United States of America as well as globally;
- Blackstone Group
- TPG Capital
- Apollo Management
- Goldman Sachs Capital Partners
- Carlyle Group
Private equity fund is regarded as a firm that helps individuals and institutions to invest in public and non-public companies. These investments which are either majority or minority stakes in companies or other forms of assets usually vary depending on the strong return rate that is being offered by these companies. The private equity fund business started becoming quite popular in the 1980s with several large buyouts coming in vogue by famous investors.
What is unique about the private equity fund is that the investments are not only less liquid but also require a longer time of investment. Most private equity funds usually depending on the size of their funds and investment strategies, exit the investment in about 3 to 5 years so as to be able to generate an internal rate of return of close to 20 or 30 percent and also a multiple on invested capital.
In order to be able to amplify its returns, private equity firms usually raise a significant amount of its debt so as to be able to purchase the assets that they would need to invest in. Also, when they intend to minimize their initial equity requirement, they make use of leverage which helped to coin the ‘Leverage Buyout’ (LBO) term. Leveraged buyouts are the primary investment strategy type for most private equity firms.
The credit crunch and global economic crisis of 2008 enabled private equity firms to start investing in a new environment. This is as private equity firms found it difficult to attract investments and also had a harder time obtaining debt financing especially as the economy made most of the investors to remain observant of happenings instead of participating and investment banks refused to underwrite debt financings. This therefore resulted in fewer buyouts and made most of the participants to return to smaller deals.
5. Decide Whether to Buy a Franchise or Start from Scratch
Starting a business from scratch or buying a franchise depends entirely on the goals and objectives of the private equity fund. Starting a private equity fund can be very capital intensive, which is why starting from the scratch can be very overwhelming for an entrepreneur.
Even though there are no franchises in this industry, there are mergers and acquisitions and any entrepreneur starting out in this industry must understand that the industry is a unique one. Before a private equity fund firm can be acquired or merged with another, it must have acquired a level of success with a lot of successful portfolios.
Starting a business from scratch can be very tedious especially if you are going to be competing against already established and successful private equity fund firms in the industry. Starting a private equity firm business from the scratch requires that a lot of strategies be put in place as this involves a lot of paper work and the need to get those who have the necessary experience to help handle the business till the firm is ready to exit. Also, starting from the scratch requires a lot of capital and every entrepreneur must also be ready to start with part of his funds so as to be able to attract the investors needed to invest in the private equity fund.
6. Know the Possible Threats and Challenges You Will Face
Starting a business from scratch comes with several threats and challenges and the private equity fund business is no different; one can even say that it is one of the toughest industries to start a business in and so entrepreneurs must be prepared about the threats and challenges that are likely to crop up and prepare strategies that will allow them overcome these threats and challenges.
Some of the challenges and threats that will likely be faced when starting the private equity fund business in the United States of America are; restrictive regulations from regulatory authorities in the industry and from the government; downturn of the economy that will see less investors putting out funds to be invested and intense competition from already existing operators as well as new entrants.
7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
Choosing the right legal entity for your private equity fund is very important as whatever legal entity you choose will have an impact on your business. It is necessary to consult attorney in order for them to set up a legal entity for your private equity fund business.
If you intend to set up your private equity fund business in the United States of America, you should know that you will either have to choose a limited partnership or a limited liability.
As the owner of the private equity fund, the law regards you as a general partner especially as you are the one that determines where the investments would come from and go to. The investors are usually referred to as limited partners because they cannot decide where you get your funds from.
Also, as limited partners, they are held liable for the losses that are tied to their individual investments while the general partners on the other hand have to handle losses within the fund and also general liabilities.
Before the business can kick off, a lawyer will be required to draft private placement memorandum and a limited partnership agreement.
8. Choose a Catchy Business Name
Any entrepreneur looking to start a business must first decide on what name will be suitable for the business as the name must be attractive enough and also bolster confidence in the intending clients. Before choosing a business name for your private equity fund firm, you must ensure that you conduct a proper search and ensure that the business name hasn’t been taken by another company.
Some of the business names that you might need to consider when starting your private equity fund business are;
- Spring-well Group
- Blue Access Funds
- Bridges Holdings
- Boston Group
- Skye Investment Funds
9. Discuss with an Agent to Know the Best Insurance Policies for You
The private equity fund industry is one that is regarded as volatile and therefore it is necessary that the best insurance policies are gotten so that the business does not have to grapple with suits and litigations from disgruntled investors, other private equity funds and even employees. Since this is not just your regular business and is a sensitive one, it is necessary that you get professional insurance agents or brokers to help you choose which insurance policies will best suit your private equity fund firm.
Below therefore are some of the insurance policies that you should consider purchasing if you intend to start your private equity fund business in the United States of America;
- General Insurance
- Liability Insurance
- Property Insurance
- Errors and Omissions Insurance
- Workers’ Compensation Insurance
- Umbrella Policies
- Business Interruption Insurance
- Payment Protection Insurance
10. Protect your Intellectual Property With Trademark, Copyrights, Patents
In starting your private equity fund business, it is necessary to consider applying for an intellectual property protection (IPP) so that you would be able to protect some of your intellectual properties. You might need to file for an IPP for your company logo, business name, patents and important and sensitive documents regarding your investments.
In filing for an IPP in the United States of America, you must send an application to the United States Patent and Trademarks Office (USPTO) but because the process might be long and rigorous, you might need to get a lawyer to help you with the whole process.
11. Get the Necessary Professional Certification
The private equity fund business is a highly regulated industry and so it is very necessary to get the necessary certifications for your business. Most of these certifications are necessary because they boost the profile of your company and also helps to bolster the confidence of your intended clients, as well as help you stand out and compete favorably against your competitors.
Most of the certifications that you would therefore need to get while starting your private equity fund business in the United States of America include;
- Certified Private Equity Specialist
- Certified Private Equity Professionals
There are more certifications in the industry but the above two are very important in ensuring that you get the necessary clients to your private equity fund business.
12. Get the Necessary Legal Documents You Need to Operate
Not having the necessary documents to run your business in the United States of America can be very disastrous for and might incur heavy penalties. In starting your private equity fund business in the United States of America, it is assumed that you must have lawyers who would have helped get all the documents that will enable you run your business legally.
It should be noted that some of the legal documents that you might get when starting your private equity fund business might differ depending on the state where you intend to operate your business from. Below are some of the legal documents that you might need in order to start your private equity fund business in the United States of America;
- Limited Partnership Agreement
- Insurance Policies
- Business Plan
- Business License
- Article of Agreement
- Contract Documents
- Non-Disclosure Agreement
- Private Placement Memorandum
- Operating Agreement
- Federal Tax Identification Number
- Employment Offer
13. Raise the Needed Startup Capital
Having the necessary finance for your private equity fund business is very important because this is a capital intensive business that requires lots of funds in order to start up and run successfully. Any entrepreneur starting this business must know all the necessary avenues by which funds must be gotten for the business in order to not only start but to also run it successfully. In the private equity fund business, you will be using funds from investors to finance other businesses.
Some of the financing options that are therefore available to you when starting your private equity fund business include;
- Using your personal savings and also selling your stock or properties to raise money
- Applying for loan from the bank
- Debt financing
- Raising money from your business partners and investors
14. Choose a Suitable Location for your Business
Choosing the right location for your business is very necessary and is therefore something that you must take seriously. You should keep in mind that wherever you choose for your private equity fund must respect all regulations whilst also enhancing your operations.
You might need to engage the services of a real estate agent who has the necessary knowledge about your kind of business to help you get a good location that will allow you get the attention of your clients.
Also, in choosing the building where you will be operating from, try and get a long term lease of at least 5 years with a 3 year break up clause. This will allow you to fully gauge the environment where you will be operating from and determine if it is right for your business.
It is vital that you locate your business within the hub where your clients are as the closer you are to your clients, the easier it is to get leads that might lead to deals. Choose a location that is in line with your budget and don’t go overspending and thereby causing a strain on your overall budget.
15. Hire Employees for your Technical and Manpower Needs
A private equity fund firm uses funds from investors to invest in private companies where there is likely to be a better long term return on the initial investment. Clients in this industry usually are institutionalized investors and high net-worth individuals. In order to operate, private equity funds require a combination of technical and manpower details.
Some of the technical skills required in running a successful private equity fund firm include; financial skills which will be used in analyzing financial statements and also knowing the value of private companies that require investment; networking skills that require having contacts and willing to meet people in order to generate leads that might lead to deals being made.
Just like any other business, there are several equipment that are required by a private equity fund firm in order to run the business successfully and they include; computer, phones, printer, scanner, fax and software.
The number of people that would be required to work in a private equity fund include; chief executive officer, managing partner, chief financial officer, portfolio managers, accountant, front desk officer, chief information security officer, chief compliance officer, admin and human resources manager, business development executive, marketing and sales executives.
Over and above, you will require at least 12 people in order to run your private equity fund successfully.
The Service Delivery Process of the Business
A private equity fund which is referred to as the general partner consists of investment teams where committed capital is raised from outside passive investors, who are also referred to as limited partners. These passive investors have certain things in common such as being high net worth individuals, have pensions, endowments and institutional capital.
The private equity firm invests the capital that has been raised into public and private companies, helps to manage the portfolio of investments and also exits the investment in future in return for a sizeable revenue.
Typically, the funds that a private equity firm controls, has a total lifespan of 10 years. The private equity firm invests the respective funds capital within a time period of about 5 to 7 years and then also has the same amount of time to exit the investment. 90 percent of the balance of funds with private equity firms is usually for new investments while 10 percent of the funds are used by portfolio companies. Even though these funds usually span different sectors, most firms usually prefer to specialize in just one area so as to grow their expertise and generate more returns from there.
The private equity firm is one that sustains itself through a continuous raise of capital. This means that as private equity firms grow their capital base from the funds received, they are then able to grow their firms majorly from an increased fee received for managing the investment they have been able to procure from the various funds that they are managing. This means that should a private equity firm not have a strong investment record, it may have to unwind its operations especially if it isn’t able to raise additional capital.
16. Write a Marketing Plan Packed with ideas & Strategies
Marketing is very important for any business as this is how a business not only generates revenue for its business that will allow it to stand out and compete favorably against its competitors but to also create awareness for it in the industry where it is operating and even beyond.
Marketing also helps a business to penetrate its intended target market and get a share of the market, which is why businesses go all out to ensure that they conduct a thorough market research for their business.
A market research allows you to understand your target market and their characteristics, know what they expect from your business and also what you should expect from them. This will enable you create the right marketing goals and objectives for your business.
It is also necessary that you empower your marketing executives so that they create marketing strategies that aligns with the goals and objectives of your organization. Below are some of the marketing ideas and strategies to use for your private equity fund firm;
- Introduce your private equity fund business to potential investors and key industry stakeholders by sending letters introducing your business and what your clients will stand to gain from you
- Ensure that you place advertisements about your private equity fund business in newspapers, magazines as well as on radio and television stations
- Install billboards in strategic locations
- Use social media platforms such as Facebook, Twitter and Linkedin to advertise your business
- Create a website and use this to market your business
- Engage in direct marketing
17. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Every business that generates revenue and intends to remain for a long time in business, will need to engage in activities that would boost the awareness for the brand and also create a corporate identity that would make them stand out and the private equity business is no different.
Every business that has remained long in the industry understands the value of publicity, which is why they do not mind spending large amount of money to ensure that they receive the publicity deserved for their business. Publicity is a two edged sword and while it helps a company achieve recognition by others in the industry, it also enables the company to be able to generate the intended revenue that would grow and boost the business.
Therefore, if your aim is to be recognized and have more clients want to invest in your private equity fund business, then creating the right publicity strategies for your business is a must. Below therefore are some of the strategies that you would need in order to boost the awareness of your brand and also create a corporate identity for your business;
- Ensure that you utilize your contacts and have them spread the word about your business
- Make use of your loyal clients to spread the word about your business
- Place adverts about your private equity fund business in local newspapers and magazines as well as on radio and television stations
- Create an interactive website and employ an SEO consultant to help with keyword search for your company
- Install billboards in strategic locations
- Sponsor and participate in local community events