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17 Jul How to Start Your Own Private Equity Fund

The latest official news about the JOBS Act has many up-in-arms about the opportunities to fund and start a mini-private equity fund without the real oversight. I recently received an email from a friend with this very idea in mind in an email he sent me:

Time for me to start a call center to raise capital for my new fund I will be launching 😉

It would be nice to call every Johnny-come-lately to help to build your first “fund” or investment pool. Yet, accredited investor status still applies. In fact, believe it or not, there are still a few rules: (i) investors still need accredited standing (ii) advertising materials must be registered 15 days prior to going live (I assume for review) and (iii) the number of investors and how their accreditation was confirmed will also be required. Unfortunately, as much as we’d like to pitch to everyone, bounds are still set. However, the ability to start one’s own private equity fund is easier now than it has ever been. In part, thanks to some of the robust tools provided on the internet as well as the large amounts of capital just waiting to be invested.

As many have already pointed out, the missing linchpin in the private equity financing ecosystem of late has been that small, would-be angels never get the opportunity to see the great potential deals that are out there. How, for instance, does someone with capital in North Dakota, connect with a budding entrepreneur in Silicon Valley? It’s a difficult connection to make, near impossible with the way the law was written. Both single entrepreneurial teams as well as fund managers are now able to access capital in a much more general way.

How to start your own private equity fund?

Starting one’s own private equity fund, like starting one’s own business, is now more easy today than in all other decades previous, but there are nuances that are extremely important if you’re to succeed.

Define an Investing Strategy

The first, and perhaps the most important part of starting one’s own private equity group has to do with strategy. Have you seen the returns of most of the major funds these days? They’re pitiful. They’ve lagged the S&P for years. First like Bain Capital and KKR are literal “has been” companies now. My first piece of advice is start with a defined strategy.

Strategy requires in-depth research and, afterwards, a rigorous focus on the defined market and market segment. For instance, some groups focus primarily on one country or geographic region due to its lack of competition in concert with robust regional demand and growth. Other firms may look at specific sectors to fine areas of arbitrage or to see where markets are grossly under-served. The most currently successful funds have focus on both areas. Unfortunately, because of the need to invest capital quickly, many often are forced to use Gust and other platforms to “shoot at anything that moves” just to get deals done.

Raise Capital

There is often a chicken-and-egg scenario that takes place between finding capital and building relationships for capital. It’s difficult to raise capital unless you have worked with and built the right relationships and its equally as difficult, without a track record, to build relationships without ever having had to raise capital (successfully) in the past. This is where the latest legislation may be helpful. Here are some general solicitation techniques that may be useful in garnering the requisite capital to start your fund (provided your targeting accredited individuals and entities):

  • Web/Social Media. Linkedin is a fabulous resource for connecting with groups and individuals seeking to fund great ideas and great teams. 
  • Direct Mail. It’s easy to buy lists and send snail and email campaigns. Return rates may be dismal, but there’s still opportunity there. 
  • Telesales. See point #2 directly above. 
  • Networking. The best and most effective method for just about everything related to business finance.

When you make your appeal to individuals, institutions and sovereign wealth funds (good luck) you may have a difficult time selling them on your accolades and past successes unless of course you’ve Stanford and Harvard as part of your credentials or have really had past successes, providing phenomenal returns. It’s much easier to raise money from a single wealthy investor than 100 semi-wealthy, semi-connected accredited investors who only help to fund portions of deals and never do more than half a dozen in their lifetime.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.