Tips to Start a Private Equity Fund

by Theo O'Brien

Most private equity fund startups I speak with want referrals to respected service providers or advice on attracting seed capital. Almost none have a business plan for their private equity fund and only a few have PowerPoint presentations explaining their investment strategy. If you are a fund manager in this position that doesn't mean you have done anything wrong but you may consider writing both a private equity fund business plan and comprehensive 15-25 page PowerPoint presentation now to make it easier to work with service providers, third party marketers, institutional consultants, and potential investors. Richard Wilson offers some helpful tips on starting a private equity or hedge fund.

Parts of your private equity fund business plan should include:

1. Management - What team members are required to run the fund effectively? What is the chain of command, how are decisions made and what happens if 2-3 professionals disappeared tomorrow? Who would take over responsibilities and what would happen to your investors funds? The importance of a well constructed and managed team can not be overstated.
2. Investment Process & Risk Management - Managing risk is what running a private equity fund is all about. Meet with your prime brokerage firm's risk advisory division, speak with your traders and portfolio managers, and network with other managers to pick up some best practices within this space. At the end of the day your risk management approach, investment process and team must be molded into one cohesive group all pointed in the right direction. There is no magic bullet to raising assets or gaining seed capital but getting this combination right is the most important thing you can focus on.
3. Service Providers: Who are you going to use as your prime brokerage firm, fund administrator, auditor or third party marketer? How will this evolve as your fund passes the $100M and $300M marks? Will you use multi-prime brokerage services? Capital introduction teams? Multiple third party marketers? Your choice of firms within this space can affect the levels of assets you manage, the quality of advice you receive and the reputation of your firm as a whole. Our advice would be to meet and interview at least 3 service providers of each type in person or over several phone calls and go with one that is well experienced yet not so large that your sub $1B account is not an annoyance to them.
4. Infrastructure & Technology: Meet with other local private equity fund managers, your trader, your prime brokerage firm and other service providers to nail down exactly what you will need in terms of reporting, processing and functioning as not only a private equity fund, but a small business. When you start a private equity fund you become an entrepreneur and you have to face all of the challenges that come with that position in addition to those challenges found in managing your portfolio. Many funds under-estimate the costs of some of the technology needed to operate as they grow beyond more simple $1-$5M fund operations.
5. Marketing: Nothing is traded or managed until the dollars come in. Anyone who joins your firm or board will want to know how you are looking to grow your business. What channels of investors will you approach? Institutional investors including fund of private equity funds, consultants, large family offices and pension funds or smaller family offices, wealth management firms, high-net-worth individuals, and accredited investor clubs? Here is a hint, in our asset raising experience the later should be 80% of your focus if you are managing less than $100M. What resources do you or should you have in place to meet these goals? Third party marketers? Databases of investors? An in-house marketing specialist? How much does this cost and when should these resources be put in place?

We will be expanding our thoughts here on what should be included in a Private Equity Fund Business Plan. We will also be providing an example business plan eventually that will provide you with a template to use for your own hedge fund startup work.