Shift Into
Your Best Business Model

Private Equity Fund Formation Lawyer


Even amateur investors are aware that private equity funds significantly outperform other markets and generate greater returns. Private funds are also not required to be registered or regulated in the same way as public investment vehicles, giving investors more control and autonomy.

As demand grows for newer investment vehicles with higher yields, many experienced portfolio managers are considering starting their own private equity funds. Here is a brief overview of private equity and why you need a private equity attorney in order to start your own fund.

What Is a Private Equity Fund?

Private equity is a form of investment where funds and investors directly invest in private companies or engage in buyouts of public companies, resulting in their delisting from public stock exchanges. This investment approach is typically characterized by long-term, illiquid investment strategies focused on significant influence or control over the operations of the invested entities.

A private equity fund, then, is a collective investment agreement in which qualified investors form a partnership in order to invest in a specified portfolio. Generally speaking, subject to certain exceptions, only institutional investors or certain accredited investors are eligible to invest in private equity funds.

Private equity investments are high-risk but often carry high rewards, outperforming the S&P and other market indices. Private equity funds are also typically active in the management and operations of portfolio firms, with the goal of achieving a certain return within a specified amount of time. Investment goals are often met by an eventual IPO or a merger or acquisition of the portfolio company. However, private equity funds are governed by the terms of the partnership agreement and can employ a wide range of financial strategies.

How to Start a Private Equity Fund

Starting a successful private equity (PE) fund takes an enormous amount of research and planning. Every PE fund is unique and has different goals and challenges, but here is a general overview of the process of beginning a private equity fund:

Establish Your Investment Strategy

A new PE fund must differentiate itself from competitors with a defined strategy that includes opportunities, goals, focus, and benchmarks. For new and emerging managers, this investment strategy is critical for the success of your fund. Choosing an industry, sector, or niche in which you have significant experience will be beneficial.

Determine Your Fee Structure and Valuation

A typical private equity fund manager receives an annual management fee of 2% of the fund’s committed capital, or assets under management (AUM). Additionally, many funds have a performance fee or carried interest, of about 20% of the fund’s profits. However, emerging managers may need to reduce their fees in order to attract investors. Determining your compliance, risk, and valuation guidelines for the fund is also important.

Create Your Business Plan

A PE fund is like any other new business. There will be costs associated with staff, office space, equipment, legal and accounting fees, and other business expenses. The fund will require cash flow projections, a working budget, variable and fixed costs, and other business plans and projections.

Draft Your Legal Agreements

Private equity funds are operated in accordance with a partnership agreement, typically as a limited partnership or a limited liability company. This agreement covers the terms of the partnership, capital call down and distribution terms, management fees, transfer of interests, and other significant provisions. You will need to work with a fund formation attorney to create your offering memorandum, partnership terms, subscription agreement, accredited investor questionnaires,, and other documents related to the investment.

You should also work with an attorney to draft employment agreements for your business, including non-disclosure and non-compete agreements, articles of incorporation, freelance and employee contracts, corporate structure and governance documents, and other legal considerations.

Private equity funds are also subject to SEC regulations and documentation and have due diligence requirements, which should be discussed with a qualified private equity attorney.

Start Your Business

Your PE fund business may require a range of consultants and advisors, as well as establishing an office, a website, and other business and marketing expenses. You will need to hire a management team and designate important employment considerations like insurance, profit-sharing and compensation, retirement, vacation, and other benefits.

Raise Capital

In order to raise capital, a new PE fund needs a solid business plan, an excellent investment strategy, and good marketing. Prepare to invest in the process of raising capital and commit your own capital to your fund.

Private equity fund managers without a strong track record of great deals, a proven strategy in the fund sector, or the ability to commit significant capital toward their own fund will have a hard time meeting their capital goals.

Recent years have made PE funds even more competitive, and new funds need to be backed by a team with an exceptional reputation in order to attract investors. If you aren’t sure whether a private equity fund is the right venture for you, speak with an advisor or consultant early in the planning process in order to make the right decision.

Why Do You Need a Lawyer for a Private Equity Fund?

As you can see, starting a private equity fund has all the challenges and strategic opportunities of starting a business, along with the additional planning and regulations related to private equity and investment instruments. This makes it even more critical to work closely with a qualified lawyer who understands investments, securities, business, and entrepreneurship. You will need to work with a lawyer to determine:

  • Legal formation and structure. Both your business and the fund partnership will have legal forms and structures, and each has specific advantages and disadvantages.
  • Investment advisor and management entities. If your PE fund has an investment advisor or manager, it is required to register with the SEC or the state securities regulator. To determine your reporting and registration requirements, speak with a private equity attorney.
  • Capital raising. Although private equity funds have fewer regulations, capital fundraising is still subject to federal and state securities laws. Your attorney will advise you on which regulations apply to your fund and how to document your fundraising accordingly.

An experienced private equity fund formation lawyer is critical in helping you assess your risks and avoid the pitfalls of new businesses of all kinds, as well as guiding compliance, regulatory, contractual, and other legal issues related to securities and investments.

The Fridman Law Firm supports your success in private equity, mergers and acquisitions, startups and IP, and as general counsel for entrepreneurship of all types. For legal expertise that is committed to your success, contact us online today or call 212-262-9823

Related Pages