How to Create a Private Equity Fund

Private equity refers to the equity ownership of privately held companies. The common stock of public companies is traded on exchanges, whereas private companies have no active market for their stock and are illiquid investments. Private equity funds are investment companies built for the sole purpose of acquiring other companies and returning their profits to the senior corporation for the benefit of its investors.

Difficulty: Challenging

Instructions

1. Establish the partnership. All private equity funds are structured as partnerships. The general partner operates the fund. Limited, or silent, partners are investors who have no management in the fund and simply provide investment dollars. A qualified business attorney should draft the partnership and fund offering agreements.

2. Define the investment guidelines. All investment funds have specific investment objectives, even funds that buy private companies. Some funds focus on specific industries such as technology or health care; other funds use other criteria such as sales revenue or geographic location.

3. Gather funds from investors. Without investors bringing money into the fund, there is no capital to start the fund with. Typically, the minimum investment into private equity funds is $250,000 or more. Financial advisers always encourage their clients to diversify their investments and typically wouldn't want more than 20 percent of their clients' assets in one fund or asset class. Because of this, private equity fund investors typically have more than a million dollars of liquid assets and are sophisticated investors.

4. Make acquisitions. With clients' money in hand to invest, the fund now must acquire companies for its portfolio. Business brokers and exit planning advisers can provide good leads for companies looking to be bought out.