How to Start a Private Equity Firm

by Evan

Over the past few years, private equity firms have enjoyed record buyouts. Therefore, it should come as no surprise that many people are looking to join this industry. Assets in private equity firm continue to grow and more professionals who would otherwise be portfolio managers have decided to join the world of private equity instead. Over the past few decades, private equity assets have significantly outperformed the Standard & Poor’s 500 (S&P 500). The demand for private equity firms continues to grow. Those wondering how to start a private equity firm need to place themselves in a position to generate alpha. Agio can provide the relevant resources necessary to place private equity firms in a position to be successful.

Defining the Business Strategy

The first step in how to start a private equity firm is to define a business strategy. This requires a significant amount of research into a defined market. Some of the popular sectors include energy development, biotech companies, and the medical field. During this time, private equity firm managers need to differentiate their plan from that of their competitors. In addition, firm managers need to think about the geographic location of their investment. All of these strategies need to align with the final goal of the fund. Is this about mergers and acquisitions? Or is this about raising capital for a potential sell down the road?

Setting Up the Business Operations

The next step is to think about the business plan and operations. This includes expected cash flow, establishing a timeline, and how the fund will raise capital. Along the way, the business needs to set up a plan for how they are going to keep their operations going. This means IT work and cybersecurity. Efficiency and safety should be at the forefront and many successful private equity firms have found it helpful to outsource these tasks. By relying on specialists from a third party, such as Agio, private equity firms are free to focus on growing and developing their firm. This is a crucial step in how to start a private equity firm.

Determining the Structure of Fees

The firm manager needs to think about how they are going to set up their fee structure. In general, most private equity firm managers receive a 2 percent fee of committed capital from their investors on an annual basis. For example, if the firm raises $20 million from potential investors, the manager will collect $400,000 annually in fees. Firm managers also generally collect something. Called carried interest. This is typically a percentage above the expected return level. Setting these guidelines is critical to the survival of the fund.

Relying on the Help of Professionals

In order for a private equity firm to be successful, they need to have the proper support system in place. Agio is a firm that provides crucial services for those who are looking to start a private equity firm. Agio will help private equity firms outsource their IT and cybersecurity work to specialists with a tremendous amount of experience who will keep firms operating at their full potential while minimizing downtime and prioritizing security.

 

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