How To Start A Private Equity Fund From Scratch

Boom, people, welcome back to the show. Today, we're gonna talk about how to start a private equity fund. We've had a lot of people ask us about this, specifically in private equity. So today's episode, we're gonna go through all of this, what you can expect when starting a fund, how to structure the entities, how to go out and find investors, how to pitch those investors, how to build a track record, how to build a team. We're gonna do all that inside today. Now, for some of you people that have listened to this show for a while, that are avid listeners that have been through the journey with us, A lot of this might be review, so if it is, you can just skip to the next step, but if you're new, this is gonna be really valuable content, stuff that I've learned over running funds over the last 4 and a half years. I've learned from incredible mentors, my dad who runs a deca-billion-dollar fund, my brother who runs $100 million plus funds, he's a securities attorney. We've had a lot of experience in the fund space, in setting up funds like this and running them, and actually we have one of our students that actually, they have a private equity fund that they've just raised over $11 million. for their private equity fund. Should be pretty exciting to see their growth over the next couple years that they're doing this. Let's dive into it. First question, Bridger, what even is private equity, right? What do you mean by private equity? What's the difference between private equity, hedge funds, venture capital funds, debt funds, real estate funds? Let's walk through it. So right here you have your public market, public growth cycle. This is your private growth cycle over here. On the left over here you have early stage, So these are way early, this is idea stage to very early implementation. These companies hopefully do well, they come up, they mature, and then they're distressed. If they're mature enough and do really well, sometimes they can go public, they can have an IPO event here, they go public, and now they're in the public markets. So where does private equity play? Well, it's in the name. Private equity deals with privately held companies. Private equity will work in the private sector, and typically they're gonna come in right around here. As a company comes through idea stage, you have venture capital. You have early-stage venture capital here, a lot of times like a Series A, B, C coming in here, and then they will get to a point they can either sell to us, a private equity firm, or sometimes those VC companies will take them public, or with a private equity company together will take them public. Some cases that's the exit. For this. Now, that's typically what people think of private equity. You see huge funds like KKR, you see Blackstone, you see— I'll just do BS, Blackstone. Good acronym right there for Blackstone, BS. Managing hundreds of billions of dollars doing this at a massive scale. However, private equity can work in a lot of different ways. I have seen a number of private equity companies that come in and they are not looking at high-tech. A lot of this is kind of the tech, you know, Silicon Valley style, right? You get your seed round, Series A, B, whatever, and then you go IPO and you become billionaires. There's a lot more that goes on in the world than just that. And so I've seen a number of private equity companies that come and they will find companies that have grown and maybe are distressed. They're down here in this spot. They will buy that company and work that company up and just treat it as a cash flow business. They're going to take that company, work it up, either have it cash flow or work it up and sell it to a bigger private equity firm, or if they really want to get ambitious, can IPO as well. I've seen other private equity companies— I have a good buddy, his entire fund goes and buys up funeral homes. They buy mom-and-pop funeral homes. Some of you guys have heard this example before, but they buy up mom-and-pop funeral homes. They're about, you know, $1 to $2 million each. They buy them up. They found that they could sell those companies as a conglomerate, about 7 or 8 of them, to a larger private equity firm for almost double of what they purchased them for. They'll buy up 7 or 8 different funeral homes, group them together, and they can sell them for $16, $17, even $18 million. to a larger PE firm. That's all they do. That is under this realm. I have another group. They do just Amazon businesses. They go find these 20-year-old kids that are running an Amazon business. They're making okay money. They've already set it up. They will use a private equity fund model to go and purchase and acquire 5 or 6 or 10 or 20 of these Amazon businesses, group them together, and they, because they're under one roof, they can take a lot of the fixed costs down. And they're actually pretty good at running these Amazon businesses and can scale them to really good levels and cash flow those businesses and pay off investors. And I'll show you what that means in a minute. But is that making sense where private equity fits in? Hedge funds typically play here. Hedge funds will play in the public space. Venture capital plays down here. Real estate funds obviously play in real estate. But that's kind of your realm where you're at. Now first, let's start off with how an actual private equity fund is structured. Okay, how is it actually put together and how do you or me as a fund manager make money doing this? By the way, private equity fund managers are usually, every time you meet one, they're usually very, very wealthy people. And so let me walk you through how that structure, how everyone gets paid. Alright, so down back to the whiteboard here, whiteboard of truth and justice, what we call it. We've got our general partner. Now again, I'm gonna explain to you how 99% of all funds are structured. There are other ways to do this. I know that you're gonna have in the comments, you could do it another way. Yes. But this is the most common way to do it. So let me explain to you. First thing you have is your general partner, okay? This is an entity, all right? And then you have a limited partnership, okay? I'm gonna do LP, limited partnership. This is also an entity. These have these squares here. These are entities. What happens is you have investors or limited partners will put money, their capital, they will commit to the limited partnership, okay? And now this is true for hedge funds, for venture capital, so if other people that have watched this channel, you've seen this before, this is true for all of these types of funds. But today we're talking specifically private equity, so we're gonna use private equity examples, okay? Limited partners will put money into the limited partnership, and you, As the fund manager over here on your general partner, you are the managing general partner of a fund, okay? This is you over here, and the general partner gets discretion over what happens inside of the limited partnership, and that's all described in 2 governing documents called your LPA and your PPM, okay? LPA stands for Limited Partnership Agreement. PPM stands for Private Placement Memorandum. You don't have to memorize those, but these are the 2 governing documents of your fund. We call them the Bible. And we call them the Bible because just like the Bible, it has all the rules, all the bylaws, all the covenants that you need to keep and obey inside of your fund. Now, the amazing, best thing about funds, okay, this is why most successful people people in finance and other places end up running a fund. This is why a lot of people end up into this space is because inside of your LPA and PPM, it will say limited partners put in, let's say this guy puts in $20 million and this person puts in, let's call it $5 million, and this person puts in $25 million, okay, a $50 million fund. This will say the general partner has control and can do what it likes with that pool of money, okay? And you, these guys are truly limited partners. You, as the fund manager, are the general partner, so you can decide down here, you can go, hey, we're gonna go buy up Company A, and we're gonna buy Company B, and we're gonna merge with Company C, or whatever it is, and you have say over it. One of your biggest limited partners, this guy right here, $25 million partner, Could call you up. Bridger, I don't like your decision here. I don't think this is right. Blah, blah, blah. You say, thank you for your opinion, but you're a limited partner. I really value your opinion. I thank you so much, but we, with our— you have hired us to make decisions on behalf of you. Now, if we did something illegal, if we broke our LPA or PPM, that's a different story, right? Maybe we have some legal stuff there, but if we've done everything right, They have no say over what happens inside of your fund. You have 100% control over that money. That's the reason 8 guys on Wall Street, 8 guys and gals on Wall Street can manage, you know, let's call it $10 billion, and they have 100% control over that money even if their investors are yelling and mad and whatever. You saw that in The Big Short, right? You saw Michael Burry, all of his investors were yelling at him, sell, you gotta get out of your short position. He said no. He said, I'm staying in my short position. I believe in what we're doing and I'm gonna stay. Right, that's the same thing that happens in the fund. It's a beautiful thing that, and that's why most people, most successful people in finance end up in the fund space. Alright, you with me so far? Is this making sense? Okay, you got your general partner, your limited partnership, and your limited partners. Now there's another entity you'll set up called your investment advisor. Or registered investment advisor, okay? Investment advisor is if you're under $150 million. Registered investment advisor is if you're over $150 million. This is another entity. It's usually the same owner, so you'll own part of that and part of the general partner. Both are managing entities of the limited partnership, and I'll explain why they're separated in just a minute. This is where you file with the SEC, and you are an invest— you give investment advice to the limited partnership, and they pay you a fee, a management fee. For doing so. Let's talk about that actually right now. Okay, I hope you guys are with me. We're moving fast here. If you want, you can go rewatch this or go wind back. I'm not going to keep going over stuff so you guys can watch it again. So now let's run through how private equity managers make so much money. How does it actually work? How is everyone paid when the assets or business make money? So I'm going to draw a timeline here from 0 to, let's call it, uh, 25%. Okay. Zero right here. Let's put like, we'll put 10 here. We'll put like 15 here, okay? And we'll call this just return, okay? We can use IRR or yield, APY. There's a lot of metrics we can use. I'm just gonna make it simple and just call this a return, okay? So we got a 10% return, a 15% return, or a 25% return, or a 0% return. That's what we're looking at on this timeline. And for this example, let's say your fund got a 20%, 2% return this year. You guys did pretty good, you got a nice return, and you now need to decide how that's all going to be split up to investors. Now, a lot of people right now, but Bridger, it's just a— it's a 2 and 20 fund, blah blah blah. It's a little more complex than that, and let me walk you through what's inside of actually a 2 and 20 model. A lot of funds up front will do something called a pref. Now, in my fund, this is what we do. We have an 8% pref. It's a preferential rate of return, meaning the first 8% of all returns goes to my limited partners. It goes right to my investors. So for example, if this year we only got a 7% return, we were right here, my investors would take all 7% because they get what's called a pref, a preferential rate of return, for risking their money in the fund. After the pref in my fund, we do a 2% catch-up. Is what it's called. So the next 2% of all dollars come to the general partner, okay? If we hit that certain benchmark. So for example, if this year we only hit 9%, the first 8% would still go to the limited partners and the next 1% would just come to me as the general partner. Is that kind of making sense? Now in my fund, once we get above a 10% return, We start splitting 80/20, 80% to the limited partners, 20% to the general partner. Now in my fund, I added one more thing, one more tier of this waterfall. So we do an 80/20 split until a 20% IRR. Once we hit that return, 20% return, we then split 50/50. So it incentivizes me as the fund manager to get even higher returns. If I get over a 20% IRR, yield or return to our fund, I then start taking 50% instead of just the 20%. And the idea there was to align our incentives with our investors. So back to our example, if we had a 22% return, first 8% would go to the limited partners, next 2% would come here. From 10 to 20, we would split 80/20. So that would be another 8 up here, another 2 down here. And then from 20 to 22, we would split 50/50, and that would be 1 up there and 1 down here. So at the end of the day, in this example, my investors would take home a 17% cash-on-cash return they would take home, and I as the fund manager would make 5%. Is that kind of making sense? You guys following me so far? Now you might be saying, well, Bridger, I'm not in this whole game to make 5%. Like, that's so small. No, yes you are. Okay, you're not making 5% on your money. Okay, you are making 5% on the entire fund. So if you look at Stephen Schwarzman and these other big fund managers that manage, let's call it $100 billion. Who would like to make 5% on $100 billion, right? I would, right? That sounds great, right? This is the ultimate leveraging other people's money, OPM model out there. Is that kind of making sense? That's why fund managers make so much money. Now before I go any further, you might be asking, well Bridger, what about management fees? And I didn't forget, I wanted to save that for the very end. A lot of funds as well will also down here charge usually about a 2% management fee, and they take that right off the top before they go out and make, you know, all this, this waterfall sequence. This is called a waterfall, what I'm explaining here. The management fee typically will go to your investment advisor or registered investment advisor. Remember I talked about earlier that other entity? So that will take the management fee just for giving financial advice. And the other stuff here, which is called carried interest— that's a keyword— carried interest goes to the— typically the general partner will take this. Now you as the fund manager participate in paying both. So with a management fee, that takes up this to probably about maybe 6.5% after you adjust for everything. Now, the reason I left this off at the beginning, my funds currently, I do not charge a management fee. And I did that because one of my mentors advised me, he said, Bridger, when you're just starting out, you're starting your first fund, people are skeptical. People don't believe that you're gonna go out and do what you do. So, to catch attention, one strategy is you don't charge a management fee. You know, when I was starting my first fund, I went out to investors and I said, hey, I don't make any money. I make $0 unless you make 8% first. There's no management fee. There's no hidden fees. I literally will not make a single dollar until you make back at least 8% first. And that was a compelling pitch for investors, and they saw the confidence that I had for this fund, and they decided to put money into what I was doing. Alright, is this making sense so far? Now you're probably sitting there like, Bridger, hold on. Okay, I get it, that's kind of the structure, I understand the structure, but how do I actually start? The name of the video is how to start a fund. And what's been interesting is over the last couple years, you know, I've ran my funds and I've started to interview other people on this channel and show that have all actually gone out and started their own funds. And I try to only interview people that did it unconventionally, were regular people like me and you. They don't have the Ivy League degree, they don't have the big Wall Street experience. They're just regular people that decided to use this incredible business model to go out and scale their business. And what was funny is I, after listening to a lot of these entrepreneurs, found a pattern for how they went and launched their funds. And we coined this pattern the Fund Launch Formula, because time and time again, every entrepreneur that had a successful fund followed this formula almost to A T to get their fund off the ground. The Fund Launch Formula is a little counterintuitive as well to what traditional Wall Street will teach you. People on Wall Street, if you go watch other videos, other content, they will tell you, alright, so if you're gonna start a fund, you've gotta hire some lawyers. First thing is get some lawyers. You're gonna spend anywhere from $30,000 to about $60,000 on legal fees. Go set that up first, then you go pitch investors. You hopefully have, you know, investors, you're building your team, you're building out all the stuff there, and if investors don't like it, well shoot, you're gonna have to go back to the drawing board and you still have to cover your $30,000 to $60,000 legal fee. This thinking is why a lot of funds have failed in the past, and I've actually seen some of these funds fail, is because they follow that. So I wanna show you a new way, a better way to go about launching a scaling fund. I used this to launch my funds, my dad used this to launch his funds, and a number of other entrepreneurs have used it. use this formula to do it. You guys ready to get into it? Get a little drum roll here. Let's dive into the Fund Launch Formula and what's inside. So when I was starting my first fund, I went to one of my mentors, I asked him, I said hey, I don't have the crazy experience, I don't have the Wall Street, you know, whatever. No one's going to invest with me. I don't have what it takes and he says Bridger, I want to give you an example. I said okay and he goes imagine we just found a Lamborghini Aventador, okay, Lambo. We found it in Billings, Montana. We can buy it this weekend for $50,000. And let's just go with me as an example. Let's say everything checks out on this Lamborghini. We've had a mechanic look at it. We've had other people look at it. This is a legit Lamborghini. The lady, she's selling it. She just is— she's going to go into bankruptcy. She needs the cash by Saturday morning, and she's willing to sell for 50 grand. Additionally, we have already found a buyer on Monday morning that'll buy the car for $200,000 in California. It's all checked out, it's all guaranteed. The only problem you have is you can't use any of your own money. You need to go raise $50,000 by Saturday morning. This was the situation he proposed to me. And he said, Bridger, could you go find $50,000 by Saturday morning. And I thought about it, and at first I said, no way. But he said, no, really, you're gonna make $150,000 this weekend. Could you go find 50 grand by Saturday? I thought about it, I thought about a former boss, college professors, an aunt, a grandpa, a great uncle, a friend from high school, anybody I could find. I thought through it and I said, you know what, I'm gonna make 150 grand this weekend. Like dang straight. You know what? Like, I'm like, you know what? I'm in. I was like, I actually, I think I could find $50 grand by Saturday. And I said, again, it's 100% guaranteed. There's no chance I lose. He said, 100% guaranteed. And I said, yeah, I think I could do $50,000. And he goes, what about $100,000? Let's say, let's say she had to raise her price. It's $100,000. You've got to raise by Saturday morning. Still, you're gonna make $100 grand spread on this deal by Monday morning. Could you find $100 grand? And I said, yes, dang sure. I'm gonna stay up late. I'm gonna be— I probably won't sleep for 4 days straight, but yeah, I, you know what? I could get $100 grand if it's 100% guaranteed. And he goes, why? And I said, well, it's 100% guaranteed. You just told me this is foolproof. There's no way anything falls through the cracks. And he goes, aha, there it is. And I went, what do you mean? And he goes, you just said it yourself. He said, 3 minutes ago, you were telling me that you were so worried that you don't have the track record of the team or all this stuff, and all of a sudden you're telling me you could raise $100,000 by Saturday because why? The deal was so good, the deal was foolproof. And he said, more often than not, The reason people can't raise money is because they do not believe in the deal enough themselves. They have not found a good enough deal, and when I say deal, it could be a business you're buying, it could be a trading strategy, whatever it is. In private equity, it could be a business you're buying. They are not confident enough to go forward with that deal and scrape and stay up all night like you were with that Lamborghini deal. He said, Bridger, step one of any fund you're starting or anything you're doing, step one is find an incredible deal. And I put deal in quotes here, but this could be the company you're gonna buy. If you have that good of a deal, and there's a lot of them out there, a lot of the other things will fall into place. So I said, okay, well I got a great deal lined up, let's say hypothetically, what's next? And most people at this point want to go and set up legal fees. Okay, I found the great deal, I found the company, let's hire some lawyers, Spend the $30 grand. Hold on. Before you go out and spend the $30,000 to go set up your legal team and all that kind of stuff, step 2 is frame the deal out. So you're going to get on an Excel spreadsheet, you're going to put out all the numbers, you're going to put together your pref and your catch-up in that 80/20 split, or maybe it's 70/30 split, what kind of management fees you're going to charge, all that kind of stuff, you frame You start putting your pitch deck together, which leads you to step number 3, which is go and pitch investors. But wait, Bridger, I can't go pitch investors. I don't have my legal docs done. This is actually how my dad raised their first $100 million fund. This is what he told me they did. They went out, they would go find investors, and typically investors are used to hearing the Harvard guys pitch. This is how Harvard guys pitch. They go, hi, you know, so-and-so, Mrs. Johnson, we're very sophisticated. We're from Harvard. We have a great idea. Over the next 18 months, over the next 18 months, we're going to go out and we're going to find great businesses and bring them together. And we theorize that we can go do all this. Maybe Mrs. Johnson says, great, thank you so much. Have a nice day. My dad would walk into that same room and say, hi, Mrs. Johnson. We're not from Harvard. However, We have just found an incredible deal. Here's our entire pitch deck. We need to close on this business or this real estate deal, whatever it is, by the end of the month. Now you're smart, you've seen things before, you've worked in business, you obviously have a successful career, you wouldn't be where you're at. Do you want to get in or out? You can poke holes yourself in the deal, but we're closing on this deal by the end of the month. And Mrs. Johnson would sit down and look at the deal and say, hey, bring on a friend or whatever consultant you need to. We believe this deal is Bulletproof, and she'd sit there and look through all the stuff and all the documents and all the all the stuff you framed out, and they would say, "Hi, Mrs. Johnson, we haven't done our legal docs yet. It's going to be done in a couple weeks, but if everything checks out, can we put you down for $500,000 as a soft commitment that you'll go towards this deal?" And she'd say one of two things: either yes, yeah, put me down for a soft commitment for $500,000, or number two, well, I don't know if I'm ready to invest yet. And if they got the second option, they'd say, well, why not? What's holding you back from doing this deal? And she'd give them a few different reasons. Maybe she didn't like the frame, maybe she wanted a different type of deal, and you can take those notes and say, well, Mrs. Johnson, if in a couple months, if we come back and we bring you a different frame, maybe different management fees or different split, or we find you a different deal, at that point, Would you invest in steel? What else would hold you back? And she'd maybe give you a few more reasons. You can get direct feedback from your investors before you go spend the $30,000 or $40,000 to go set up your fund. So at this point, step number 3, go and pitch investors. Get soft commitments of $500,000, $1 million, $5 million, $10 million. Go and soft pitch investors. When you have an adequate amount of money that you feel is good enough that you've soft raised, then and only then, go to step 4 and set up your legal docs, okay? And what you'll do here is you go and you hire a lawyer, and they, yes, you gotta spend the 30 grand, right, to go and do it. And actually, inside of our, we have a mastermind program, we help our students do it for a lot less. A lot of our students are spending anywhere from 8 to maybe 12 grand to set up their fund. But typically off the street, you're anywhere from 30 to 60 grand if you're not in our programs. But that's what you do. You go set up your legal docs, then you go back to your investors and you say, hey, time to put money in, and the $30 grand you just spent is a reimbursable expense to the fund. It's a startup cost. And so you put the money down. What you just did is you— investors paid you to build a fund for them. They paid you to go out and structure and put together a fund. That will benefit them. Boom, baby! That is the fund launch formula in, in about 5 minutes, me putting this together. Again, step number 1, find that incredible deal. Okay, 2, frame it out. 3, pitch investors. 4, legal docs. Now, questions at this point is, Bridger, well, wait, okay, the step 1, how do I find that incredible deal? There's a lot of great sites out there— bizbuysell.com, Empire Flippers— that are actually brokerage services for businesses, even small-scale businesses that are being listed to sell. It's a great way to get your feet wet. However, if you're like me at this point, you say, well, Bridger, okay, I get the idea. I get the frame. I understand the general partner, limited partnership. I understand the split, but I just don't know if I have the network to raise money, or I don't know if I have the expertise to go out and find and buy private equity businesses. That's okay. No one does this game by themselves. There's 3 distinct circles or positions inside of a fund. Over here you have your money raiser. Okay, this person is a natural salesman, already has an incredible network, has spent, spent the last 10 years building out an incredible network of investors. The middle circle, you have your fund manager. This person is very good at operations, audit, legal, accounting, SEC compliance. All funds goes under this circle. And then finally, you have your expert investor. This is your chief investment officer. This person has done real estate or bought businesses for 25+ years. However, they have no clue how to run a fund, and they have probably no clue how to raise money. Currently in my fund, right now we've soft raised on that fund platform about $18 million. setting up in the next few weeks. Myself, I'm very good at fund management, this middle circle, and I brought on another partner that's very good at— he's an expert investor and we're doing real estate deals. I don't know the first thing about real estate deals. That's okay because I'm pretty good at running a fund and I'm actually pretty good at raising money, and so I can compensate where he is not good on that side of things. Again, no one does this alone. It's not the how. Stop asking yourself How do I go and find these deals? Change your question to who. Who can I find that can raise me the money? Or who can I find that can go be my expert investor partner to go help me do this? Or who can I find that can help me run the fund? And that's what we do inside of— we have actually a lot of content stuff online. We're trying to build an online community of people that we can connect these dots. One guy in our group They actually met inside of our program, our group. He was an expert investor, the other guy was a money raiser, they came together, they've raised, I believe, already over $5 million for their fund they're going out and doing right now. So again, no one does this alone. So there you have it, that was a crash course on how to start a private equity fund. If you're interested, we have a lot of other videos that go in more depth than this video. We have a 1-hour free training if you wanna click below. We have a Facebook group, we have a bunch of other stuff online, online programs and stuff. Shoot me a DM or message if you want more of that, but go check out other stuff on our channel, subscribe, all that stuff. We have a podcast, everything else is out there to help more and more people understand what's happening behind the curtain on these private equity and hedge fund space. Hope you guys enjoy, and I'll see you next episode. Bye. Bye.