Private Equity Fund Structure Explained

Hey guys, welcome back to the show. So today we're gonna talk about private equity fund structure. We're gonna go in, pull back the curtain, and show you the actual guts of what happens inside of private equity funds. And this expands to real estate funds, hedge funds, the whole nine yards, but specifically today talking about private equity funds. Now when I first got involved in this game, you know, a lot of you guys know my story, but I went and met with my dad, who at the time is a co-founder of a $20 billion family of real estate funds. It's just wild and I didn't know that. We lived in a small house growing up and I realized he runs this huge fund. I'm like, Dad, what are you talking about? You know, what's going on here? And he started to teach me about the fund world because I was always curious about— I heard these people that ran private equity funds and they were so much, they were so wealthy, there were huge amounts of wealth. I don't care how long it takes me, I'm gonna figure this out. My dad actually sat down and explained this to me and it made a lot of sense and helped me understand what was going on because if you know, if you're like me, I go out and I've read a dozen or so private equity books. And they love to tell you about the sexy deal of this buyout, leveraged buyout they did, and it was so cool, blah blah blah. But no one really walks you through how they structure it, how they actually raise the money, how they actually got the licenses and SEC compliance with the fund. They just talk to you about the cool acquisition; they never talk to you about the guts. So that is what we're going to do today on the whiteboard of truth. Here it is: the. Trusty whiteboard of truth. A lot of truth, a lot of justice happens on this whiteboard, and we're gonna talk about that today. Alright, so private equity fund structure. So I met with my dad, and this is what he taught me. We sat down and talked, and I'm gonna go from really simple to pretty complex, hopefully, and hopefully share a few things. If you like what we're talking about, give me a comment or whatever below, send me an Instagram DM, and I'd love to talk more about it if you have other questions. Okay, so my dad sits down and he goes, Bridger, this structure I'm about to explain to you is how 99% of all money is raised in the United States. This structure right here. Now there's other ways to do it, but 99% of all money comes through this structure. I said, okay, I'm in. He says, Bridger, in every fund you have at least 2 entities. And I was like, okay, so entity number 1 is right here. This is your general partner. You're gonna put GP right here. This is your general partner. This is you. This is your fund management. And you, as the fund manager or the private equity fund, they manage funds. And the fund is right over here. It's a different entity, and it is called the limited partnership. Okay? And your investors put money in. I'm gonna erase this right here, 95%. Your investors or limited partners come up here and you start pitching people. They love your idea. They have money. This is investor. I'm gonna put LP right here. Your LPs, you'll kind of hear that terminology, my LPs, that they mean investors, put money into the limited partnership from wherever they're at. And this is essentially a pool of money. The limited partnership is a pool of money that you, as the general partner right here, can pull from that pool of money and go make investments. For private equity companies, They're usually buying and selling businesses. So they will go and grab this money and they'll go buy Victoria's Secret, right? Victoria's Secret. You're like, wait, hold on, you can't just go buy Victoria's Secret. Yeah, you can. Sycamore Partners actually in the process, I think they just canceled it, but they were in plans to buy Victoria's Secret. They had a fund, a limited partnership that went out and that fund buys Victoria's Secret. Sometimes they set up special purpose entities right here. And then that special purpose entity buys it, but that's a separate entity, but it's owned by the limited partnership. Then they can go Apollo Global Management, they'll go buy GEICO, okay? GEICO Insurance, they go and buy that company. How cool is that, right? To have a fund that goes and buys other big companies. And they go buy these companies and depending on the private equity fund and how they want to do it, sometimes they will kick out the management teams and they keep them, which Whatever their plans are for succession, and they hopefully are going to take those companies and maybe one day they IPO, maybe one day they sell them to a bigger private equity company, maybe one day they go and they break it up into different pieces and they sell those pieces off. Like Victoria's Secret, I think, has like Pink and these other little brands. Maybe they break them off and they sell them individually for more money. And what happens is when these investments make money down here, And maybe they just hold them, right? Every year they're just kicking off cash. The money flows up to the limited partnership, and this is a pass-through entity, and it gets split to the limited partners, and the general partner takes a piece of that. And that's how these fund managers make so much money, is they are helping manage these huge deals, facilitating billions and billions of dollars, And they take a split of that, and it turn that little split turns out to be a lot of money. I'm gonna dive a little bit deeper to that. We good so far? You guys with me still? Okay, so your limited partners put money in. You go and buy thing. Now, there's a very distinct rule about how everyone's paid. Okay, so a limited partnership. I'm gonna walk you through that right now. And we have different videos talking about waterfall structure, how that all works. But I want to walk you through how everyone is paid. Okay, you have your general partner, limited partnership. A lot of these funds also have. what's called a registered investment advisor, RIA. Now, the RIA or investment advisor advises the fund. It gives advice on, yes, we should buy Victoria's Secret. No, we shouldn't buy GEICO. Or, we should buy this real estate project. Or, we shouldn't. The investment advisor gives and they get paid for their advice. So in every fund, and there's other videos that talk about this, I hope you've already seen them. If you haven't, go back on the waterfall structure. But there are 2 different fees. There is a management fee and what's called a performance fee. And these things are sometimes split up, but those are the 2 main variables inside of a fund. It's— what's interesting, it's very precise on where these fees go, okay? So the limited partnership, a lot of people go, well, it's just an 80/20 split. No, it's not. It's a little more complex than that, okay? And on our waterfall chart, we go deeper, but right here, the management fee from the limited partnership goes directly to the registered investment advisor. A lot of funds charge a 2% fee, and that's if, if you make money, if you work, if you don't work, this RA is going to make 2% no matter what. So if you had a billion-dollar fund, billion dollars, that's $20 million a year that goes right to these guys to just pay these fund managers, whether they're good fund managers or not. They get paid 2%. Now, if the fund makes money, usually over your pref, The general partner takes the performance fee. 2 different fees, okay? Performance fee. So, if the general— usually what happens if the fund makes over an 8% return, the general partner starts taking what's called carried interest. I'm saying a lot of buzzwords right now. If you don't know what I'm talking about, go back to the waterfall structure, but that's where the 2 fees hit differently. You can change these fees. funds charge a 1% fee. Some funds do a 70/30 split. You can determine what you want to do on these fees, but that's how fund managers make so much money. This is not what you're going to find in any private equity book. They don't talk about this structure. And the limited partners all get paid pro rata how much money they put in the fund. So if, for instance, what pro rata means is if you put in 4% of the total money, of all the returns going to limited partners, you're going to get 4%. Back, right? The amount of money that you have in, you're gonna get returned back from you. So that's your pro rata percentage. So this guy put in $10 million and this guy put in $2 million, and we got returns this year. This guy will take home 5 times more than this guy because he risked more money in the fund and invested more. Does that make sense? Anyways, that's kind of how it's structured. Now, this is all under 2 governing documents, and they're called your LPA and your PPM. Limited partnership agreement and private placement memorandum, or POM sometimes. These are termed as the Bible. Okay, the Bible. I'm gonna write down here. The Bible determines all this stuff. What's gonna happen? How every all the money is moved around. So the Bible will say the LPPM will say, "Hey, we're gonna charge instead of a two percent, we're gonna do a one point five percent management fee." Okay, it's in the Bible. You wrote the Bible. You got to stick. Stick to the Bible. But the best part about funds is you get to write the Bible. Imagine like a religion where you get to write all the rules, okay? So, in here, you get to write all the rules as long— now, once they're written, they're written. You got to follow them. But you're the one that helps write them in the beginning for your limited partner. So, if you're limited partners, you say, hey, once you put money in, you've got to keep your money in for 8 years. And a typical private equity fund, they're usually 8 to 10-year funds because Year 1, 2, and 3, they're going to go out and buy these Victoria's Secret, they're going to buy GEICO Insurance, they're going to season them, and by year, let's call it 7, they're going to start trying to sell these companies and hopefully get you a big profit at the end. So these are long-term hold funds. Usually they want your money in for a decade. So they say, hey, once you put your money in, we have it for a decade and we're going to give it back to you, which is a long time. My fund, I took my LPA and PPA and I said, no, I'm doing something different. You put your money with me and it's only a one-year hold. So my money's in, your money's in for one year with me, and after that it's a 60-day notice you can pull your money out. And that's totally fine because I get to write the Bible. It's the best thing about fund. Most questions you're gonna have about fund structure goes, well, it depends. You can do it really however you want as long as it follows the Bible. Is this making sense so far, you guys? You're still with me? This whiteboard's getting really messy, but hopefully this is the whiteboard of truth and justice. Hopefully something is Has hit you so far. Now, I want to teach you a cool rule. This is what helped me launch my first fund because if you're going to charge a management fee and a performance fee, you need to have a license to do so. And you need a license to set up this registered investment advisor. And usually you need what's called a Series 65 to do so. If you don't charge a management fee right here and you don't set up a registered investment advisor and you only charge performance fees, meaning I as the fund manager, you as the fund manager, only make money when the fund makes money. The SEC says you don't need to have a Series 65. Interesting. So I set up my funds. I do not hold a license right now. This is how I was able to set things up. I only charge performance fees on my fund, and I only have a general partner. I do not have an investment advisor to do so. And my LP and PPM say Bridger is the general partner owner, and he gets performance fees. Only when the fund makes money. So if this year though, the risk of that is that if this year the fund only makes a 6% return, I make $0 on the fund. That's a risk I'm willing to take as a fund manager. I put my money where my mouth is with my investors. And by the way, I'm not pitching anybody. I do not want you to invest in my funds. I have too much, too many investors actually giving me money because we've set up our fee structure in a good way using this model. I hope that helps. I hope that gave you a little bit of light. If you want to go rewatch this video, if it was— I went a little bit fast. I know I talk fast. But if you want to go watch this again, check this out. But this is how 99% of all funds are raised. And this is under— what I'm talking about is a Form D, Form D, Regulation D, Reg D 506. And most funds are under a 506. You can also do a 506, and there's a few other different funds. But this Form 506 is how I run my funds and how I would say 99% of all money raised in the world comes through that structure. Hope you guys enjoyed, and I will see you on the next episode. If you like this stuff, hit the subscribe button, follow us, send it— leave us a good comment if you can or something, give us a good review, or hit me up on Instagram. I'd love to hear your questions, your comments, and everything you guys think about this. See you in the next episode. Peace. Bye.