How To Create a Private Equity Fund?

Question

Hi Everyone!

I've heard of various individuals starting private equity funds where investor funds are acquired before finding a deal whereas syndications are vice-versa. I'd like to learn more about how private funds are structured, the pros and cons, tax implications, limitations, and anything else worth knowing. I understand something this high level would need an attorney's oversight, but I would like to learn more for my own knowledge. Any and all information/resources would greatly be appreciated!

Chris Levarek · Answer

@Tanh Truong You might be interested in the podcast, Investment Fund Secrets by Bridger Pennington.

Evan Polaski · Answer

@Tanh Truong, funds and syndications are nearly identical from a very high level, they are both LP investments.  They both have waterfalls, they are both newly formed entities, etc.  You are still offering securities to passive investors.  How you treat the taxes is going to depend on how you and your securities and tax attorney set it up, but generally taxes are treated the same way, and assuming the LP structure, your investors get a K-1.

The biggest difference, tactically, is in your marketing and investor demand. A Fund is likely going to require a much stronger and longer track record.  A one off syndication, particularly if you are newer sponsor, will be as much about the property, as the sponsor.

Taylor L. · Answer

One of the top thought leaders in this space specifically is Hunter Thompson. He has a training program specifically about the fund of funds model. If you want to go that route, check out his Raisemasters program.

Jeffrey Donis · Answer

@Tanh Truong

"Using an active management strategy, private equity real estate takes a diversified approach to property ownership. General partners (GPs) invest in a variety of property types in different locations, which can range from new development and raw land holdings to complete redevelopment of existing properties, or cash flow injections into struggling properties."

You check out the link to read more below. Hope this helps!

https://www.investopedia.com/t...

Spencer Gray · Answer

It's not necessarily much different from a "typical" syndication. However, unlike a single asset syndication, capital commitments are often made in advance of projects being identified and typically the mandate/goal of the fund is to acquire multiple assets, although the strategy can vary and a fund could invest in a single asset.

Having a fund gives the operator a great advantage as they have the "cash in the bank" and are much more likely to close than a syndicator that has to race to raise funds between a project going under contract and closing (usually 45-90 days).

Sometimes funds can have higher fees, but not necessarily. Funds can be a great way of gaining instant diversification. If you trust the sponsor and the strategy aligns with your goals and objectives they can be a great investment vehicle.

Some like to build their own portfolios of single asset syndications, it can take more time but there is more control over individual portfolio construction.

Mitchel Foster · Answer

Chris is right, Bridger's podcast has a ton of great info to offer.

Paul Moore · Answer

Hi @Tanh Truong. If you’re going to be the operator, you’ll likely be fine by treating the fund as a pool of syndications and using a syndication attorney. But if you’re planning to invest in other sponsors’ deals, you’ll want to use a fund attorney. They treat the assets as securities rather than real estate, and that’s an important distinction.  Good luck!

Bryan Hancock · Answer

Joel Block has a Dealmaking Symposium twice a year that you should attend.  He walks you through how to set up a fund, tradeoffs, etc.

Chris I. · Answer

I believe if your fund reaches a certain threshold you have to register with the SEC and file yearly/quarterly paperwork, etc.

Tanh Truong · Answer

Appreciate all the info, friends. Very informative!

How To Create a Private Equity Fund?

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