If you are a first time fund manager, establishing a private fund is a fairly attainable process. In later articles, we’ll provide a quick overview of the process, starting with a basic description of fund structure. Next week, we’ll list some of the key considerations fund founders should keep in mind while vetting and accepting limited partners.
Private Equity Fund Structure: A Simple Overview
During the earliest stages of fund formation, the primary fund founder and his or her team are known as General Partners, or GPs. General Partners work together to attract and retain commitments from Limited Partners (LPs) who may include high net worth individuals looking for investment opportunities, but can also consist of institutional investors and organizations looking for stable investment vehicles. These types of potential limited partners will most likely consist of pension funds, retirement funds, and insurance companies.
As these institutions—LPs—provide capital, the General Partners choose companies in which to place private investments. Over time, this list of companies will grow into a substantial portfolio.
Before a new Limited Partner begins providing capital, the organization will sign a Limited Partner Agreement (and often a few special considerations listed in a separate document), which will include all the details of liability and accountability on both sides of the table, and will also typically include structural details like the length of a given commitment (for example, ten years), how profits will be divided, and how management fees will be applied.
Before you sign on with your team of General Partners and launch your search for LPs, you’ll need to establish the parameters of your fund and the commitments you’ll make to the LPs who sign agreements with you. For example, you’ll need to establish the focus of the companies in your portfolio. Which industry sectors and geographic regions will you target? What research have you conducted to determine the strength and growth potential of these investments?
You’ll also need to clarify the obligations and liabilities that will make up the details of your LPA, and you’ll need to hone the pitch you present to target LPs. You’ll also need to determine which types of LPs will and won’t work for you. We recommend that you commence this process with a fund term sheet that can be used to suss out commitments. And of course, fundraising on these types of investment vehicles must at all times be compliant with state and federal securities rules.
Tune in next soon—We’ll list some key considerations to keep in mind while selecting potential LPs.