A private equity real estate fund is an excellent way to make money if you have the financial know-how to manage other people’s money and generate profits for them. Capital is probably the biggest roadblock you might encounter. However, once you have enough money in place, it’s time to set up a private equity real estate fund.
What Is a Private Equity Real Estate Fund?
A private equity real estate fund is an investment pool managed by investment bankers, companies, or individuals with the authority to manage assets on an investor’s behalf. These funds collect money from investors, known as limited partners, and manage a portfolio of properties on their behalf.
Private equity funds act as general partners and are responsible for investing the money they collect in low liquidity and long-term investments after researching investment opportunities, handling paperwork, and evaluating risks and benefits.
Most equity funds are financed by accredited investors with a net worth of $1 million or more. Plus, they’re open only to qualified clients and accredited private investors (those with $200,000 gross annual income or higher).
How to Form a Private Equity Real Estate Fund
Now that we’ve covered why you should start a private equity real estate fund, let’s talk about how to actually start one.
Define Your Business Strategy
Private equity firms invest in properties that aren’t traded on the public market. This means you have to understand and define the business strategy behind each investment to make sure it can generate the revenue your investors want.
Plus, investors will want to know more about your fund’s goals and why you’re investing in specific properties, especially those in emerging markets. This makes it even more crucial to create a business strategy that details exactly what you will do.
Create a Business Plan
Once you’ve determined why you’re investing in certain properties, you have to create a business plan containing everything from your expected cash flow and your fund’s timelines to how long it would take to raise enough capital.
Your business plan should contain a strategy on how your fund will grow its investments over time and how it will attract more investors, as well as an executive summary that explains how you’ll accomplish your goals.
Preplanning involves setting up an external team of consultants who can provide insights into the properties you’re thinking of investing in. It’s also a good idea to create a risk mitigation plan in case of market downturns.
You should settle on a fund name at this point, iron out the roles and responsibilities of the executive and management teams (such as the CEO, COO, and CFO), hire staff, and outline compensation packages.
Set Up the Fund’s Legal Structure
Once your fund’s corporate structure is created, you need to establish its legal structure. Typically, you register your fund as a limited liability company or a limited partnership, where you act as a general partner with the authority to bring in investors.
Investors are known as ‘limited partners.’ They need to sign a private placement memorandum before placing any funds in your custody.
Establish a Fee Structure
Now that you’ve registered your fund, you should determine how much you’ll charge for your services.
Most private equity real estate funds take a 2% annual management fee. This means that for every $1 million raised, the manager will collect $20,000 in management fees every year. However, if you’re just starting out or don’t have much experience, you may need to charge less.
You also have to set the carried interest and hurdle rates, as well as create risk, valuation, and compliance guidelines for the fund.
Once you set up your company, it’s time to convince people to invest in the fund. You can jumpstart the process by investing your own money to raise the first 1% to 3% of the total fund amount. After that, you’ll have to look for institutional and accredited investors to provide capital.
Accredited investors usually have a net worth of $1 million or more, and a gross income of at least $200,000 over the past two years. Institutional investors include sovereign wealth funds, pension programs, insurance firms, and university endowments. Once you’ve gained funding, you can begin building your portfolio.
How much you ask each investor to put in is up to you, but you can always check out what the competition does, such as CrowdStreet’s minimum investment.
Summing It All Up
If you have the experience and are respected by those in the private equity sector, starting a real estate fund may be the perfect next venture. There are a number of steps you should take when starting your own company, but the one that is most important is raising the capital needed to start investing in real estate.