Private Equity and Financing Methods
Most funds are structured because this gives you the most protection possible in such a way that you can raise an unlimited amount of money, but here, we are talking about the private equity fund structure. A private equity fund is created when an investment company (the General Partner) invites other investors to become limited partners to pool their capital and make investments together on behalf of all of them.
There are millions of dollars in private equity looking for good companies and smart owners. Even if you think your business doesn't qualify – maybe it's not big enough, generates too little profit, or employs too few employees – you might be surprised to find others appreciate it. I can say this because, in my experience, I am often surprised at what companies are loved and coveted by investors, yes, even those that are currently unprofitable.
Let's take a look at some of the basics of starting a private equity fund. Everything I'm about to tell you is something I've personally learned from my mentor, my friends, and my experience starting my fund. Let's dive in!
What is Private Equity?
Private equity is raising money and investing it to buy a privately held company that is in trouble or has growth potential. It's like turning a house upside down. If you find something of unseen value that needs work, fix it and sell it to someone else to make money, or leave it alone if you need cash. Now various companies can do this. Tech companies are the most commonly heard of, but they're not the only ones in the world. I also know a few other personalities who do this. The possibilities are truly endless.
How will I be paid?
There are general partnerships that are managed by fund managers, and there are limited partnerships where investors (or limited partners) deposit money for investment. As far as, it makes sense?
Let’s assume I now have a separate entity called an Investment Advisor for less than $150 million and a Registered Investment Advisor for more than $150 million. This is what the SEC has to do with it and how they get their administrative fees. The way I will get paid is based on a few different things. It's based on what it's called. For example, it has an 8% priority in my fund. This means that the first 8% of all returns will be sent to my limited partner with no fees. So, if I get a 7% yield, all the money goes to the investor. This is to reward investors who have invested in my fund. Then I keep 8% to 10% of all these profits. Once the revenue is over 10%, I split the revenue 80/20. That is, get 20% of any percentage above the 10% mark. If you end up with a 20% return, then split it 50/50 by percentage. My pricing is based on performance only. This gives you the incentive to do good business for your investors. Some funds charge an administration fee, which is usually 2%, but not mine.
So, what you want to do is totally up to you. Make sure the fees are clearly stated in the Limited Partner's fund documentation. These become the foundation's "bible" and the laws of its agreement with them.
How do Private Equity Funds work?
What I teach my students now is a little less traditional than what someone on Wall Street might do when they raise money. I tell them that you need to pitch an investor. So, what if investors don't like your ideas or investment theory? Now you have to go back to the drawing board and still pay legal fees! So, this is a better way to start a fund. A mentor of mine once told me that the reason people fail is that they don't believe in the deal itself. It's not foolproof, and it's too risky. With one of my fund-launch methods, we can eliminate this. My formula helps people understand that they have to find incredible deals. Then assemble the deal. They write all the numbers, charges, and returns on a blank sheet of paper and are easy to read. Now we are different here. I recommend approaching investors before launching a fund. The reason is that investors will trust you more when it comes to making real trades than when theorizing what they can do with their money. You will find that legal documents and fees can be handled. Best of all, the money spent on these documents will be reimbursed by the fund. You have eliminated all risks. It's up to you to close the deal and see it through to the end.
Creating a fund does not have to be risky. There is no need to follow Wall Street. I don't think it's a good idea to follow their path. I certainly wouldn't, because it's too risky for me. With my funds, I was able to safely and systematically raise millions of dollars. Limited partners invest in the fund and receive an ownership stake. The general partner manages the fund and takes some of the risks. Limited Partners are limited in their liability. They approve LPA and PPM, which are two very thick legal documents that essentially say what your fund can and can’t do, but you need to understand these documents in and out because investors are going to ask you about little minute details as they put money into the fund because they believe you have expertise. All these documents are handled under the cabinet commandments of Regulation D-506 B.
