Fund formation and first-time fund managers

How do I start my first private equity fund?

Decide who will write the checks

Before you form anything, get clear on your investors. At Family Office Club I talk with family offices constantly, and one thing comes up first. They care about keeping their money.

In my experience, many of these investors are entrepreneurs or did well in the private sector. They know how to make money. They often care more about not losing principal than they do about taxes, high growth or a new exciting idea. Build your strategy and your pitch around protecting capital.

Put credible names around you

A first-time manager has no track record as a fund manager yet, so the team has to carry weight. Family offices want managers who are consistent, reliable and professional. I tell fund managers to add well-known people to the team. That could be a former executive of a large investment bank, someone from a well-known private equity shop, or a respected business figure who is now a savvy investor. If someone like Richard Branson were on your advisory board, investors might take your meeting more seriously.

Here is my two-minute summary of what family offices look for in private equity fund managers.

Summary and key takeaways from this video

Service matters too. Many fund managers want to raise from pension funds, endowments and foundations, where you can raise 20, 30, 50 or 100 million at a time. In my experience, many family offices allocate 3 million, 5 million or 10 million, and sometimes 1 million or less. So they often get treated as small. They complain about weak reporting and about not having a senior person to call. If you do better on that, they may stay longer and refer other families.

Keep a clear position and a flexible structure

I like a crystal clear position about what you do. I do not like a rigid deal structure. Some groups push starting a fund as the answer to everything. But many investors want direct deals and will not join a fund unless they know the manager very well. They also dislike being blind to the deals inside it.

So consider offering co-investment rights to fund investors. You could also let people invest in one, two or three deals before they decide whether to join the fund. After three deals, they either like and trust you or they do not. Many large private equity firms offer co-investments and direct investments, which can help them raise more.

In this talk I explain why a take-it-or-leave-it fund structure rarely works with entrepreneur investors.

Summary and key takeaways from this video

If you walk into a room and say here are the terms, take it or leave it, it will not go well. Get to know the investor first.

Bring in securities counsel for the legal setup

I am not an attorney, so treat this as general background only. Many managers talk to a securities attorney about how to structure the fund. Many managers involve securities counsel early, before discussing terms with investors.

From the Family Office Club stage

One thing I would add is how you describe your fund. If you say you are a lower middle market private equity fund, it means almost nothing to most investors, because every other private equity fund says the same thing. Claims like best in class team and world class service do not set you apart either. Be specific about what you actually do, who you do it for and why you are the one to do it. That gives a family office something they can remember and repeat to someone else.

Key facts

• Pension funds, endowments and foundations can write 20, 30, 50 or 100 million at a time, while in my experience many family offices allocate 3 million, 5 million or 10 million, and sometimes 1 million or less.
• Family offices say fund managers often fail to give consistent reporting or assign a senior person who can answer questions after the money is invested.
• One approach is to let investors try one, two or three direct deals before deciding whether to join the fund, since after three deals they either trust the manager or they do not.

General education only. Not legal, tax or investment advice.

Talk to a securities attorney to explore options around fund entity structure, offering exemption options and offering documents. Do not use AI to write your own legal agreements.

Your next steps

1. Write a one-page strategy that puts capital preservation first.
2. List the well-known people you could add to your team or advisory board.
3. Decide whether to offer co-investment rights or a few direct deals before investors commit to the fund.
4. Plan how you will report to investors and who they can call.
5. Talk to securities counsel about the legal setup of the fund.

People also ask

Related questions

• Why should the management company be separate from the fund?The two do different jobs, so many managers think about keeping them in different entities.
• What are clawback provisions in fund agreements?A clawback provision in a fund agreement is generally meant to bring back money that was already paid out, under conditions the agreement sets.
• What is the biggest challenge for first-time fund managers raising capital?The biggest challenge is earning trust before you have a track record.
• What is a side car fund and when is it used?A side car fund is a separate vehicle that invests next to a main fund, usually in a single deal.

Work through it with the data room checklist. See all fund formation and first-time fund managers resources.