Launch Your Private Equity Fund in 2025: Costs, Steps, and Strategies

Gordon Scott, a Chartered Market Technician (CMT), brings over 20 years of experience as an active investor and technical analyst.

Private equity remains one of the most lucrative asset classes, continuously expanding as more portfolio managers and firms enter the market. Over recent decades, private equity has consistently outperformed the S&P 500, attracting institutional and accredited investors worldwide. This growing demand for alternative investments creates opportunities for new fund managers to deliver exceptional returns and differentiate themselves.

Essential Insights

• Private equity firms are thriving by outperforming the S&P 500 index.
• Launching a fund begins with crafting a clear, targeted investment strategy.
• Developing a detailed business plan and operational framework is critical.
• Raising capital is often the most challenging step, with managers typically investing 1% to 3% of the fund's capital.

Leading private equity firms like Blackstone Group, Apollo Global Management, TPG Capital, Goldman Sachs Capital Partners, and Carlyle Group set industry standards. However, many successful funds operate on a smaller scale, ranging from a few team members to hundreds. Here’s how to start your private equity fund in 2024.

1. Define Your Business and Investment Strategy

Begin by clearly outlining your fund’s unique strategy. Conduct thorough market research to identify sectors or industries where you can add value—whether it’s energy, biotech, technology, or emerging markets. Clarify your geographic focus and investment objectives, such as operational improvements, balance sheet restructuring, or growth capital for acquisitions.

Private equity investments focus on private companies, so defining the purpose behind each investment is crucial. Are you seeking capital appreciation, facilitating ownership transitions, or driving strategic growth? These decisions will shape your fund’s identity and appeal.

2. Develop a Robust Business Plan and Operational Setup

Create a comprehensive business plan detailing cash flow projections, fundraising timelines, and exit strategies, typically spanning 10 years. Include a marketing plan to attract investors and an executive summary that ties your goals together.

Assemble an external advisory team including independent accountants, legal counsel, and industry experts. Establish an advisory board and prepare contingency plans for risks like cyber threats or market downturns.

Choose a compelling fund and firm name, define leadership roles such as partner, CEO, CFO, and compliance officers, and build a strong management team. First-time fund managers benefit from partnering with experienced professionals or spinning out from established firms.

Set up your physical and technological infrastructure, hire staff, and design compensation packages that may include profit-sharing, bonuses, health benefits, and retirement plans.

3. Establish the Legal Structure of Your Fund

In the U.S., private equity funds are commonly structured as limited partnerships or limited liability companies. As the fund founder, you will act as the general partner, controlling investment decisions and bearing unlimited liability. Investors become limited partners, responsible only for their committed capital without involvement in daily management.

Work with legal counsel to draft key documents such as the private placement memorandum, limited partnership agreement, and operating agreements to ensure regulatory compliance and clarity.

4. Define Your Fee Structure

Set clear terms for management fees, carried interest, and hurdle rates. Typical management fees are around 2% annually on committed capital, though newer managers might offer lower fees to attract investors. Carried interest usually stands at 20% of profits exceeding a predefined hurdle rate, commonly around 5%. Establishing compliance, risk management, and valuation policies is equally important.

5. Capital Raising Strategies

Prepare essential fundraising documents such as the offering memorandum, subscription agreements, partnership terms, custodial agreements, and due diligence questionnaires. Develop compelling marketing materials and secure severance letters from previous employers if applicable, to legally promote your track record.

Raising capital is the most demanding phase. Managers typically invest 1% to 3% of the fund’s total capital to demonstrate commitment. Your ability to attract institutional investors—like pension funds, insurance companies, and sovereign wealth funds—and accredited individual investors depends on your strategy, performance history, and marketing approach.

Accredited investors must meet income or net worth thresholds defined by the Securities Act of 1933, ensuring compliance with investment regulations.

6. Build and Manage Your Investment Portfolio

Once capital is secured, begin selecting portfolio companies aligned with your investment thesis. Active management and strategic oversight are key to driving growth and generating superior returns.

Conclusion

Private equity offers unparalleled opportunities for investors seeking above-market returns. By following these structured steps—defining strategy, building a strong operational base, establishing legal frameworks, and successfully raising capital—you can launch a thriving private equity fund in 2024. Stay focused on delivering value and adapting to market demands to ensure long-term success.

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