How to Start a Private Equity Fund

June 6, 2022

Private equity and venture capital fundraising has recently been toppling records, as investors increasingly look to the alternatives industry for diversification opportunities. As demand builds, so does the corresponding “supply chain,” in the form of new funds and new fund managers. Between 2010 and 2020, 316 first-time funds debuted in the US and 130 in Europe.

Starting a private equity firm comes with universal challenges not unlike starting any business, from securing initial funding to deciding on infrastructure and staffing, to choosing a team of advisors (lawyers, compliance officers, accountants, etc.). This guide is focused on best practices for burgeoning general partners who are launching their first institutional fund.

What is an emerging manager?

This phrase typically describes managers actively launching and raising capital for their first, second, or even third fund, generally with a track record of two years or shorter or with assets below a particular threshold. It can also refer to a fund that is majority owned by those typically underserved in the community (like women or people of color). While there are occasional references to “first-time managers,” the “emerging” verbiage covers the entire segment of new and growing firms.


The emerging manager landscape

Size and scope

The challenges of prospecting had a notable impact on newly formed firms over the past two years, as limited partners usually want in-person meetings as part of standard due diligence. After raising more than $14 billion in both 2018 and 2019, first-time funds in North America collected just $8.9 billion in 2020.

As the world begins to re-open and in-person gatherings become more feasible, cultivating relationships and making new connections will likely be easier, as evidenced by the $14.6 billion raised by North America-based first-timers in 2021.


While European first-time venture funds saw a similar recovery in fundraising activity, the raw number of new funds continues to lag previous years.

Emerging manager valuations plateau


Performance of first-time funds

Judging by internal rate of return, first-time funds historically outperform more-established rivals, in part due to the hard-to-quantify drive of emerging managers needing to build a successful track record from the outset. The size of first-time funds – on average, between $100 million and $200 million, per PitchBook – can also be an advantage, as small funds can be more agile and produce greater relative returns.

IRR quartiles by fund type


Perception of emerging managers

Despite the Covid-related challenges emerging managers faced (inability to connect with prospects in person, e.g.), the untapped potential of new managers is still appealing to investors. The fifth annual Buyouts Emerging Manager Survey of Institutional Investors revealed increased confidence in the emerging managers market segment when compared to their more established counterparts.

Risk/return profile of emerging managers


Once an investor has committed to evaluating emerging managers, there are specific factors they consider. Top of the list? ESG policies, as 70% of investors hope to work with an emerging manager to help bolster their own DEI goals. While there are still no defined ESG parameters in the private equity space, it’s clear that investing in ESG means future-proofing a business for a more values-driven investing sect. Emerging managers have the advantage of integrating ESG into their strategies from the outset. Powerful analytics and database tools can help ensure the process runs smoothly and tracks the most germane data.

“Companies that want to stand out in the capital markets can’t afford subpar ESG results.”—Natasha Stokes, Crowe LLP


READ MORE: 3 Ways ESG Will Change Portfolio Monitoring for Private Equity and Venture Capital Managers

Similarly, 89% of institutional investors say the composition of an emerging manager team is “extremely” or “very important,” outpacing the 80% and 73% who prioritize investment strategy and track record, respectively.

Steps for starting a private equity fund

As the private equity space continues to swell in terms of both participants and dry powder, the number of ambitious fund managers has followed suit. And beyond the decisions involved in starting a firm itself – hiring or outsourcing partners and consultants, buying supplies and setting up a workspace, securing registration, insurance, and licenses, and more – there are practical rites of passage needed to bring a fund to an established state where fundraising can begin.

1. Write a business plan

Much of a new fund’s business plan should mirror that of any start-up business. Cash flow projections, including fixed and variable costs, a working budget, and a projected timeline are important considerations. Strategies for marketing to facilitate growth and then managing for that growth may also be concluded as part of an initial plan. This will show consultants and potential investors that you are serious and committed.

Central to a fund’s business plan is the investing strategy. A firm grasp on the long- and short-term fundamentals of a specific industry, along with market sentiment toward that industry, provides a foundation for all-important research into potential portfolio companies. If an emerging manager has experience with and passion for a particular niche, that will be apparent to potential investors. In parallel with the industry is the investment type: growth equity, management or leveraged buyouts, venture capital, etc.

Share of private equity capital raised in the US using selected strategies


2. Work out the legal details

In the US and Europe, most funds are established as either limited partnerships or limited liability firms. New funds can work with their attorneys to complete the necessary paperwork for this and other operating agreements, like articles of association and the limited partnership agreement (LPA).

Emerging managers can also lean on their legal consultants to help vet potential LPs through a due diligence and know-your-customer (KYC) process. Lawyers can help establish guidelines for cybersecurity and disaster recovery processes, too.

Additionally, lawyers, accountants, and other third-party consultants can help new funds complete and file key documentation that may include but not necessarily be limited to the following:

READ MORE: Advice to my 2nd-Fund Self, with Osage Venture Partners

3. Calculate fee structure

Another perceived advantage of emerging managers is lower fees, or at least emerging GPs that are willing to negotiate. While many GPs are more flexible in the early stages of their business, they also need to fairly consider their financial needs as they begin to invest in people and technology.

When negotiating fees, who do you believe LPs generally negotiate harder with

Once you’ve settled on these terms, you may want to create a simple but professional-looking sell sheet that can be distributed to prospects digitally or handed off in person. The sheet can describe a fund’s strategy and fees, along with other information like minimum required capital commitment, anticipated capital raise and closing period, and any other terms specific to the fund.

4. Find prospective limited partners

The barriers to launching a first fund are high, and the most critical step is finding investors who are willing to wager on an unproven commodity. This step is challenging, but not impossible, and there are starting points to consider:

“Not all emerging managers will succeed. The bar has been raised and only the very best will survive to shake off their emerging manager label.” – Amy Carroll, Buyouts Emerging Manager Report, Sep. 27, 2021

Family offices are among the most receptive to pitches from first-time managers – in fact, 37% of capital committed to emerging managers came from this source, more than any other. Targeting outperformance over risk avoidance, they may also be drawn to the startup nature and shared values of new fund managers versus larger institutional investors.

Some large institutions, such as the Los Angeles Fire & Police Pensions and the New York State Common Retirement Fund, have established emerging manager programs. These organizations have committed to allocating some of their resources to underserved or newly formed firms in an effort to diversify their holdings and potentially benefit from new and novel strategies. Here’s a list of emerging manager programs that might be helpful.

Fund of funds may also be willing investors in early-stage managers, especially ones targeting the lower middle market.

Finally, first-time fund managers may also find success using placement agents or consultants that vouch for their work and put them in touch with appropriate LPs.

29% of emerging managers are using a placement agent

How technology can help emerging managers

Across the global private equity space, investment in new technology has steadily grown over the last five years and is expected to keep doing so. Specifically, global spending on enterprise resource planning solutions is projected to surge from $30 billion in 2021 to $49 billion by the end of 2025. Investment in cloud security software is expected to see similar demand.

Every free moment helps first-time fund managers, who are typically juggling multiple tasks and wearing several hats. And even in the early stages of growth with minimal resources, firms are expected to deliver polished client communications and meet increasing demands from their prospective and current LPs. Leveraging technology to stay organized and automate key processes can save precious man-hours and reduce the risk of errors.

Allvue created the Venture Capital Essentials and Private Equity Essentials solution sets with the emerging manager in mind. This space has unique technology needs, so we leveraged our existing best-in-class software – designed for the world’s largest enterprise firms – to create a more accessible and scalable solution. These comprehensive sets of accounting, reporting, and investor communication tools allow firms to streamline processes, deliver high-quality client service, and discover efficiencies that will prepare your company for continued growth.

Are you a first-time or emerging manager ready to launch a new fund? Discover how Allvue’s solutions can help supercharge your growth now and scale with you in the future.


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