My business partner and I are starting our own Private Equity firm. My main question is when we start a fund, how should we determine how much capital we will want to raise for that fund? Is it based on the size of the portfolio we want? Is it based on how many investors we have? Or is it just a number we feel we want to raise?
You should raise enough so that you can afford fixed costs. Your lawyer should cost $25-50k, accountant 20k, insurance 10k, rent, marketing material, sales staff, etc.
While the 2/20 model has largely disappeared, you need to make enough on your deals to make the upfront capital outlay worth it.
I think you should raise what you think your business model could handle.
It's the three pillars of any business: execution, capital, and sourcing. Each fluctuates regularly so it's really just about maintaining that balance between the three as best as you can.
I wouldn't start one until I had 100 million plus in commitments from my investors. Pension funds, university endowments, and some colleagues from Greenwich and Wall St. Then I'd set aside about $3mm for my startup costs: Office leasing, my securities counsel buddies from Cravath...Bloomberg terminals and jet leasing. Then I'd be off to Paducah and Omaha to line me up a billion or so of SFRs to BRRR. Boom off to the races and collect my 2 and 20 for 5 years or so. In the meantime I'd be raising my second fund.
@Dave Van Horn thank you for the input. My partner has wealthy connections as well as his friend who we are adding his existing brokerage business under our main firm. We are talking with university endowments, sovereign funds etc. So thank you for the input.
@Brian Wheeler - I think I have some good advice on this. The answer is simple: as much as you can spend responsibly.
The thing is, you don't want to make your first fund "too big." The analogy I always think about is moving into your first house: you realize quickly things you wished you considered before you bought the house. Like, you don't like where the outlets are placed and you will look for that in your next house. It's the same with a fund - "oh I wish I charged this fee; or set up this structure; or allowed myself to buy these assets." So don't make your fund too big or ambitious, because you can always make a better, second one.
@Jillian Sidoti thank you for the advice I appreciate it!
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