business plan for private equity investors

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How to Start Your Own Private Equity Fund

Private equity firms have been a historically successful asset class and the field continues to grow as more would-be portfolio managers join the industry. Many investment bankers have made the switch from public to private equity because the latter has significantly outperformed the Standard & Poor's 500 Index over the last few decades, fueling greater demand for private equity funds from institutional and individual accredited investors . As demand continues to swell for alternative investments in the private equity space, new managers will need to emerge and provide investors with new opportunities to generate alpha.

Key Takeaways

• Private equity firms are growing thanks to their outperformance of the S&P 500. 
• Starting a private equity fund means laying out a strategy, which means picking which sectors to target.  
• A business plan and setting up the operations are also key steps, as well as picking a business structure and establishing a fee structure. 
• Arguably the toughest step is raising capital, where fund managers will be expected to contribute 1% to 3% of the fund’s capital. 

Today's many successful private equity firms include Blackstone Group, Apollo Global Management, TPG Capital, Goldman Sachs Capital Partners, and the Carlyle Group. However, most firms are small to midsize shops and can range from just two employees to several hundred workers. Here are several steps managers should follow to launch a private equity fund .

Define the Business Strategy

First, outline your business strategy and differentiate your financial plan from those of competitors and benchmarks. Establishing a business strategy requires significant research into a defined market or individual sector. Some funds focus on energy development, while others may focus on early-stage biotech companies. Ultimately, investors want to know more about your fund's goals.

As you articulate your investment strategy , consider whether you will have a geographic focus. Will the fund focus on one region of the United States? Will it focus on an industry in a certain country? Or will it emphasize a specific strategy in similar emerging markets? Meanwhile, there are several business focuses you could adopt. Will your fund aim to improve your portfolio companies' operational or strategic focus, or will this center entirely on cleaning up their balance sheets ?

Remember, private equity typically hinges on investment in companies that are not traded on the public market. It's critical that you determine the purpose of each investment. For example, is the aim of the investment to grow capital for mergers and acquisitions activity? Or is the goal to raise capital that will allow existing owners to sell their positions in the firm?

Business Plan, Operations Setup

The second step is to write a business plan, which calculates cash flow expectations, establishes your private equity fund's timeline, including the period to raise capital and exit from portfolio investments . Each fund typically has a life of 10 years, although ultimately timelines are up to the manager's discretion. A sound business plan contains a strategy on how the fund will grow over time, a marketing plan to target future investors, and an executive summary, which ties all of these sections and goals together.

Following the establishment of the business plan, set up an external team of consultants that includes independent accountants, attorneys and industry consultants who can provide insight into the industries of the companies in your portfolio. It's also wise to establish an advisory board and explore disaster recovery strategies in case of cyberattacks, steep market downturns, or other portfolio-related threats to the individual fund.

Another important step is to establish a firm and fund name. Additionally, the manager must decide on the roles and titles of the firm's leaders, such as the role of partner or portfolio manager. From there, establish the management team, including the CEO, CFO, chief information security officer, and chief compliance officer . First-time managers are more likely to raise more money if they are part of a team that spins out of a previously successful firm.

On the back end, it's essential to establish in-house operations. These tasks include the rent or purchase office space, furniture, technology requirements, and hiring staff. There are several things to consider when hiring staff, such as profit-sharing programs , bonus structures, compensation protocols, health insurance plans, and retirement plans.

Establish the Investment Vehicle

After early operations are in order, establish the fund’s legal structure. In the U.S., a fund typically assumes the structure of a limited partnership or a limited liability firm. As a founder of the fund, you will be a general partner, meaning that you will have the right to decide the investments that compose the fund.

Your investors will be limited partners who don't have the right to decide which companies are part of your fund. Limited partners are only accountable for losses tied to their individual investment, while general partners handle any additional losses within the fund and liabilities to the broader market.

Ultimately, your lawyer will draft a private placement memorandum and any other operating agreements such as a limited partnership agreement or articles of association .

Determine a Fee Structure

The fund manager should determine provisions related to management fees, carried interest and any hurdle rate for performance. Typically, private equity managers receive an annual management fee of 2% of committed capital from investors. So, for every $10 million the fundraises from investors, the manager will collect $200,000 in management fees annually. However, fund managers with less experience may receive a smaller management fee to attract new capital.

Carried interest is commonly set at 20% above an expected return level. Should the hurdle rate be 5% for the fund, you and your investors would split returns at a rate of 20 to 80. During this period, it is also important to establish compliance, risk and valuation guidelines for the fund.

Raise Capital

Next, you will want to have your offering memorandum, subscription agreement , partnership terms, custodial agreement , and due diligence questionnaires prepared. Also, marketing material will be needed prior to the process of raising capital. New managers will also want to ensure that they have obtained a proper severance letter from previous employers. A severance letter is important because employees require permission to boast about their previous experience and track record.

All of this leads ultimately leads you to the biggest challenge of starting a private equity fund, which is convincing others to invest in your fund. Firstly, prepare to invest your own fund. Fund managers who had had success during their careers will likely be expected to provide at least 2% to 3% of their money to the fund's total capital commitments . New managers with less capital can likely succeed with a commitment of 1% to 2% for their first fund.

In addition to your investment track record and investment strategy, your marketing strategy will be central to raising capital. Due to regulations on who can invest and the unregistered nature of private equity investments, the government says that only institutional investors and accredited investors can provide capital to these funds.

Institutional investors include insurance firms, sovereign wealth funds , financial institutions, pension programs , and university endowments. Accredited investors are limited to individuals who meet a specified annual income threshold for two years or maintain a net worth (less the value of their primary residence) of $1 million or more. Additional criteria for other groups that represent accredited investors are discussed in the Securities Act of 1933 .

Once a private equity fund has been established, portfolio managers have the capacity to begin building their portfolio. At this point, managers will start to select the companies and assets that fit their investment strategy.

The Bottom Line 

Private equity investments have outperformed the broader U.S. markets over the last few decades. That has generated increased demand from investors seeking new ways to generate superior returns . The above steps can be used as a roadmap for establishing a successful fund.

Bain & Company. " Public vs. Private Equity Returns: Is PE Losing Its Advantage? "

United States Office of Government Ethics. " Capital Commitment ."

U.S. Securities and Exchange Commission. "' Accredited Investor' Net Worth Standard ."

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Business Plan Template for Private Equity Firms

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As a private equity firm, making informed investment decisions is crucial to maximizing returns for your investors. That's why having a comprehensive business plan template is an absolute game-changer. With ClickUp's Business Plan Template for Private Equity Firms, you'll have all the tools you need to evaluate and assess potential investment opportunities. This template allows you to dive deep into a company's strategy, financial projections, market analysis, and growth potential. Streamline your due diligence process, make data-driven decisions, and set your investments up for success. Take your private equity firm to new heights with ClickUp's Business Plan Template today!

Business Plan Template for Private Equity Firms Benefits

A business plan template for private equity firms offers a range of benefits, including:

• Streamlining the evaluation process by providing a structured framework to assess investment opportunities
• Ensuring all necessary information is included, such as financial projections and market analysis, for comprehensive due diligence
• Facilitating effective communication with stakeholders by presenting a clear and concise overview of the investment opportunity
• Enabling better decision-making through a systematic analysis of the company's strategy and growth potential
• Maximizing returns for investors by identifying risks and opportunities early on and developing appropriate strategies for success.

Main Elements of Private Equity Firms Business Plan Template

When it comes to evaluating potential investment opportunities, private equity firms need a comprehensive business plan template that covers all the necessary aspects. ClickUp’s Business Plan Template for Private Equity Firms offers the following key elements:

• Custom Statuses: Keep track of the progress of each section with statuses like Complete, In Progress, Needs Revision, and To Do.
• Custom Fields: Utilize custom fields such as Reference, Approved, and Section to add relevant information and track the approval process.
• Custom Views: Access five different views, including Topics, Status, Timeline, Business Plan, and Getting Started Guide, to easily navigate through different aspects of the business plan.
• Collaboration and Organization: Leverage ClickUp's collaboration features, such as assigning tasks, adding comments, and attaching files, to streamline the business planning process for private equity firms.

How To Use Business Plan Template for Private Equity Firms

If you're a private equity firm looking to create a solid business plan, ClickUp's Business Plan Template is the perfect tool to help you get started. Follow these steps to make the most of it:

1. Define your investment strategy and goals

Before diving into your business plan, it's crucial to clearly define your investment strategy and goals. Are you focused on a specific industry or region? What are your target returns? Having a clear understanding of your investment approach will guide your decision-making throughout the business plan.

Use custom fields in ClickUp to outline your investment strategy and goals.

2. Conduct thorough market research

To create a comprehensive business plan, you need a deep understanding of the market you're operating in. Research industry trends, competitive landscape, potential risks, and opportunities. This information will help you assess the viability of potential investments and make informed decisions.

Use the Table view in ClickUp to organize and analyze your market research data.

3. Develop financial projections

Financial projections are a critical component of any business plan. Use historical financial data and market research insights to forecast revenue, expenses, cash flow, and profitability. Consider various scenarios and sensitivity analyses to assess the potential risks and rewards of your investments.

Utilize the Gantt chart in ClickUp to create a timeline for your financial projections and track progress.

4. Outline your investment thesis and exit strategy

Your investment thesis outlines the rationale behind your investment decisions and identifies the value you aim to create. Clearly articulate the drivers of value, whether it's operational improvements, market expansion, or strategic partnerships. Additionally, define your exit strategy, whether it's through an IPO, sale to another firm, or management buyout.

Use the Docs feature in ClickUp to write a detailed investment thesis and exit strategy.

By following these steps and utilizing ClickUp's Business Plan Template, you'll be equipped to create a comprehensive and compelling business plan for your private equity firm.

Get Started with ClickUp’s Business Plan Template for Private Equity Firms

Private equity firms can use the Business Plan Template for Private Equity Firms in ClickUp to streamline their evaluation and assessment process for potential investment opportunities.

First, hit “Add Template” to sign up for ClickUp and add the template to your Workspace. Make sure you designate which Space or location in your Workspace you’d like this template applied.

Next, invite relevant members or guests to your Workspace to start collaborating.

Now you can take advantage of the full potential of this template to create comprehensive business plans:

• Use the Topics View to organize and structure the business plan by different sections, such as strategy, financials, market analysis, and growth potential
• The Status View will help you track the progress of each section, with statuses like Complete, In Progress, Needs Revision, and To Do
• Utilize the Timeline View to set deadlines and milestones for each section, ensuring timely completion of the business plan
• The Business Plan View provides a comprehensive overview of the entire plan, allowing you to review and analyze all sections in one place
• Use the Getting Started Guide View to provide instructions and guidance for team members on how to use the template effectively
• Customize the Reference, Approved, and Section custom fields to add additional information and categorize different aspects of the business plan
• Monitor and analyze the progress of each section and the overall business plan to ensure accuracy and quality.
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Private Equity Firm Business Plan [Sample Template]

By: Author Tony Martins Ajaero

Home » Business Plans » Financial Services

Are you about starting a private equity firm ? If YES, here is a complete sample private equity firm business plan template & feasibility report you can use for FREE .

If you are an investment banker or you have been able to grow through the ladder of the business world with a niche in investment, then you should consider starting your own private equity firm. Private equity firms make use of their available funds or raised funds from investors with the aim of investing in underperforming companies with potentials, with the aim of repositioning the companies.

Starting this type of business does not only require huge capital base but also relevant experience in the industry. If you have not cut your teeth in the industry, you are likely not going to get investors to commit their cash in your business. Investors only invest their hard earned money with those who have track records in investment.

If you have decided to start a private equity firm, then you should must make sure that you carry out thorough feasibility studies and market survey.

Business plan is yet another very important business document that you should not take for granted when launching your own business. Below is a sample private equity firm business plan template that will help you to successfully write your own.

A Sample Private Equity Firm Business Plan Template

1. industry overview.

The Private Equity, Hedge Funds & Investment Vehicles industry is made up of Private equity funds, hedge funds, closed-end funds and unit investment trusts. This firms basically raise capital to invest in various asset classes. Industry assets have become increasingly integral to institutional investors’ portfolios and the larger asset-management market.

Institutional investors are individuals or organizations that trade securities in such substantial volumes that they qualify for lower commissions and fewer protective regulations since they are assumed to be knowledgeable enough to protect themselves.

Increasing demand from institutional investors has contributed to the surge in the industry’s assets under management (AUM) and revenue over the past five years.

It is a fact that the Private Equity, Hedge Funds & Investment Vehicles industry is growing faster than most industries in the financial services sector not only in the united states but across the global market. Industry value added (IVA), a measure of the industry’s contribution to the overall economy, is projected to increase at a 6.9 percent annualized rate over the next 10 years.

Without a doubt, the Private Equity, Hedge Funds & Investment Vehicles industry is a very large and thriving not only in the developed nations, but also in developing and under developing countries of the world. Statistics has it that the Private Equity, Hedge Funds & Investment Vehicles industry in the United States of America is worth $229 billion, with an estimated growth rate of 7.3 percent between 2013 and 2018.

There are about 20,647 registered and licensed private equity firms in the United States and they are responsible for employing about 80,298 people. It is important to state that there is no company with a dominant market share in this industry.

A recent report published by IBISWorld shows that over the past five years, the Private Equity, Hedge Funds & Investment Vehicles in the US industry has grown by 7.2 percent to reach revenue of $229bn in 2018. In the same time frame, the number of businesses has grown by 2.4 percent and the number of employees has grown by 8.8 percent.

The report also shows that an increase in the regulation and taxation of private equity, hedge funds or other investment vehicles may raise their compliance costs, reduce their returns and limit the number of investment activities companies can undertake.

Regulation for the Investment Management industries is expected to increase in 2018, posing a potential threat to the industry.

So also, institutional investors such as retirement and pension plans, are the largest contributors to alternative investment vehicles, such as private equity and hedge funds due to their low liquidity and high-return needs. As pension plans increase their asset levels to fund future retirement benefits, they will invest in private equity and hedge funds and boost industry revenue through asset-management fees.

Demand from retirement and pension plans is expected to increase in 2018, representing a potential opportunity for the industry. The truth is that with the rate at which private equity firms and similar businesses are growing in the United States, it means it is a business that is worth starting most especially if you have the expertise and capital.

2. Executive Summary

Thomas McKenzie® Private Equity Firm, Inc. is a registered, licensed and accredited private equity firm that will be based in Medford – Oregon.

We are well equipped to operate in the Private Equity, Hedge Funds & Investment Vehicles industry and carry out key functions that revolve around raising capital to invest in various asset classes in the United States of America. We are aware that to run a standard private equity firm can be demanding which is why we are well trained, certified and fortified.

Thomas McKenzie® Private Equity Firm, Inc. is a client – focused and result driven private equity firm that provides broad – based services. We will offer trusted and profitable services to all our clients. We will ensure that we work hard to meet and surpass our clients’ expectations whenever they invest their funds with us.

At Thomas McKenzie® Private Equity Firm, Inc., our client’s best interest would always come first, and everything we do is guided by our values and professional ethics. We will ensure that we hire professionals who are well experienced in this line of business with good track record of return on investments.

Thomas McKenzie® Private Equity Firm, Inc. will at all times demonstrate her commitment to sustainability, both individually and as a firm, by actively participating in our communities and integrating sustainable business practices wherever possible.

We will ensure that we hold ourselves accountable to the highest standards by meeting our client’s needs precisely and completely.

Our plan is to position the business to become one of the leading brands in the Private Equity, Hedge Funds & Investment Vehicles industry in the whole of Medford, and also to be amongst the top 20 private equity firms in the United States of America within the first 10 years of operation.

This might look too tall a dream but we are optimistic that this will surely be realized because we have done our research and feasibility studies and we are confident that Oregon is the right place to launch our business before expanding to other cities in the United States of America.

Thomas McKenzie® Private Equity Firm, Inc. is owned and managed by Thomas McKenzie. Thomas McKenzie has a Degree in Business Administration from Northern Michigan University; MBA in Economics from Columbia Business School. Investing is a family trait that Thomas McKenzie inherited from his father, a stockbroker and U.S. congressman.

At the age of 13, Thomas McKenzie made his first investment, and by the age of 13 he was selling horse racing tip sheets and operating a paper delivery service. Thomas McKenzie has over 18 years’ experience working at various capacities in the Private Equity, Hedge Funds & Investment Vehicles industry in the United States of America.

3. Our Products and Services

Thomas McKenzie® Private Equity Firm, Inc. is going to offer varieties of services within the Private Equity, Hedge Funds & Investment Vehicles industry in the United States of America. We are prepared to make profits from the industry and we will do all that is permitted by the law in the United States to achieve our business goals. Our business offerings are listed below;

• Private equity funds
• Hedge funds
• Closed-end funds
• Unit investment trusts
• Trade in financial products
• Related investment consulting and advisory services

4. Our Mission and Vision Statement

• Our vision is to build a private equity brand that will become one of the top choices for investors in the whole of Medford – Oregon. We want to be known for professionalism and outstanding results.
• Our mission is to position the business to become one of the leading brands in the Private Equity, Hedge Funds & Investment Vehicles industry in the whole of Medford, and also to be amongst the top 20 private equity firms in the United States of America within the first 10 years of operation.

Our Business Structure

The truth is that it won’t be out of place if we decide to settled for two or three staff members, but as part of our plan to build a standard private equity firm, we have perfected plans to get it right from the beginning which is why we are going to hire qualified, competent, honest and hardworking employees to occupy all the available positions in our firm.

The picture of the kind of the private equity firm we intend building and the business goals we want to achieve is what informed the amount we are ready to pay for the best hands in Oregon and environs as long as they are willing to work with us. Below is the business structure that we will build Thomas McKenzie® Private Equity Firm, Inc.;

• Chief Executive Officer
• Private Equity Consultants/Investor Specialists

Admin and HR Manager

Risk Manager

• Marketing and Sales Executive
• Chief Financial Officer (CFO)/Chief Accounting Officer (CAO).
• Customer Care Executive/Front Desk Officer

5. Job Roles and Responsibilities

Chief Executive Office:

• Increases management’s effectiveness by recruiting, selecting, orienting, training, coaching, counseling, and disciplining managers; communicating values, strategies, and objectives; assigning accountabilities; planning, monitoring, and appraising job results
• Responsible for fixing prices and signing business deals
• Responsible for providing direction for the business
• Creates, communicates, and implementing the organization’s vision, mission, and overall direction – i.e. leading the development and implementation of the overall organization’s strategy.
• Responsible for signing checks and documents on behalf of the company
• Evaluates the success of the organization

Private Equity Consultants/Investor Specialist

• Provides market research and implementing new investment product and strategies
• Create research and review platforms for new, existing and potential investment products
• Exceed client expectations with returns on investments
• Works closely with analysts and traders to ensure trading strategy is carried out correctly
• Construct and review performance reports to show to investors
• Performs due diligence visits and assessing investment management firms and quantitatively analyzing investment pools
• Plans, designs and implements an overall risk management process for the organization
• Performs risk evaluation which involves comparing estimated risks with criteria established by the organization such as costs, legal requirements and environmental factors, and evaluating the organization’s previous handling of risks;
• Establishes and quantifies the organization’s ‘risk appetite’, i.e. the level of risk they are prepared to accept;
• Performs risks reporting in an appropriate way for different audiences, for example, to the board of directors so they understand the most significant risks
• Carries out processes such as purchasing insurance, implementing health and safety measures and making business continuity plans to limit risks and prepare for eventualities
• Conducts audits of policy and compliance to standards, including liaison with internal and external auditors;
• Provides support, education and training to staff to build risk awareness within the organization.
• Responsible for overseeing the smooth running of HR and administrative tasks for the organization
• Designs job descriptions with KPI to drive performance management for clients
• Maintains office supplies by checking stocks; placing and expediting orders; evaluating new products.
• Ensures operation of equipment by completing preventive maintenance requirements; calling for repairs.
• Defines job positions for recruitment and managing interviewing process
• Carries out induction for new team members
• Responsible for training, evaluation and assessment of employees
• Responsible for arranging travel, meetings and appointments
• Oversees the smooth running of the daily office activities.

Marketing/Investor Relations Officer

• Identifies prioritizes, and reaches out to new partners, and business opportunities et al
• Identifies development opportunities; follows up on development leads and contacts
• Responsible for handling business research, marker surveys and feasibility studies
• Documents all customer contact and information
• Represents the company in strategic meetings
• Help to increase growth for the company

Chief Financial Officer (CFO)/Chief Accounting Officer (CAO)

• Responsible for preparing financial reports, budgets, and financial statements for the organization
• Prepares the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.
• Provides managements with financial analyses, development budgets, and accounting reports
• Responsible for financial forecasting and risks analysis
• Performs cash management, general ledger accounting, and financial reporting for one or more properties
• Responsible for developing and managing financial systems and policies
• Responsible for administering payrolls
• Ensures compliance with taxation legislation
• Handles all financial transactions for the company
• Serves as internal auditor for the company

Client Service Executive/Front Desk Officer

• Welcomes guests and clients by greeting them in person or on the telephone; answering or directing inquiries.
• Ensures that all contacts with clients (e-mail, walk-In center, SMS or phone) provides the client with a personalized customer service experience of the highest level
• Through interaction with clients on the phone, uses every opportunity to build client’s interest in the company’s services
• Consistently stays abreast of any new information on the company’s products, promotional campaigns etc. to ensure accurate and helpful information is supplied to clients
• Receives parcels/documents for the company
• Distribute mails in the organization
• Handles any other duties as assigned by the line manager

6. SWOT Analysis

Thomas McKenzie® Private Equity Firm, Inc. engaged the services of a professional in the area of business structuring to assist our organization in building a well – structured private equity firm that can favorably compete in the industry.

Part of what the business consultant did was to work with the management of our organization in conducting a SWOT analysis for Thomas McKenzie® Private Equity Firm, Inc. Here is a summary from the result of the SWOT analysis that was conducted on behalf of Thomas McKenzie® Private Equity Firm, Inc.;

Our core strength lies in the power of our team; our workforce. We have a team that can give our clients good returns on their investment; a team that are trained and equipped to pay attention to details and to deliver excellent jobs. We are well positioned and we know we will attract loads of clients from the first day we open our doors for business.

As a new private equity firm, it might take some time for our organization to break into the market and gain acceptance especially from corporate clients in the already saturated Private Equity, Hedge Funds & Investment Vehicles industry, that is perhaps our major weakness. So also we may not have the required cash to give our business the kind of publicity we would have loved to.

• Opportunities:

The opportunities in the Private Equity, Hedge Funds & Investment Vehicles industry is massive considering the number of investors and small businesses who would need investment support from private equity firms to grow their businesses and increase their profits. As a standard and accredited private equity firm, we are ready to take advantage of any opportunity that comes our way.

Private equity services involve a large amount of cash and it is known to be a very high risk venture, hence whoever chooses to manage it must not just have solid investment background, but must also know how to handle risks and discover potential thriving businesses and opportunities.

The truth is that if you are not grounded in risks management as a private equity, you may likely throw away peoples’ monies. Just as in any other business and investment vehicles, regulations, tax, economic downturn, unstable financial market and unfavorable government economic policies can hamper the growth and profitability of private equity firms.

7. MARKET ANALYSIS

• Market Trends

A close observation of happenings in the industry shows that in the dawn of recessionary declines, the industry is expected to continue on a path to growth, but not without a few ups and downs. As a result of this trend, Private Equity, Hedge Funds & Investment Vehicles industry revenue is expected to grow over the five-year period at an annualized rate of 7.3 percent.

The revenue growth for the industry was restrained in the early part of the period as the industry was reluctant to bounce back from the financial crisis and subsequent recession of the prior period that caused stock markets and business activity to dramatically contract in the United States.

The nature of private equity investment requires the services of core investment professionals. As a matter of fact, before any investor can commit their hard earned money under your care as a hedge fund manager, they usually would want to know your profile.

On the average, private equity firms employ strategies that can help them reduce market risk specifically by shorting equities or through the use of derivatives.

This is why many investment strategies, mostly arbitrage strategies, are limited as to how much capital they can successfully employ before returns starts diminishing. Little wonder most successful fund managers place limit on the amount of capital they will accept per time.

8. Our Target Market

Private equity is simply an investment medium that enables big time accredited investors pool cash or capital together to be able to invest in securities and any other form of investment opportunity that requires large initial capital to invest.

The fact that hedge funds requires large capital makes it easier for only the rich and accredited investors to cash in on it. Hedge funds are only open to limited partners with the required cash for investing in capital intensive business portfolios.

Our target market cuts across businesses and investors that are willing to invest. We are coming into the industry with a business concept that will enable us produce good returns on investment for our clients. Below is a list of the individuals and organizations that we have specifically designed our services for;

• Accredited Investors
• Wealthy People in the Society
• Investment Clubs
• Top corporate executives
• Corporate Organizations / Blue Chip Companies
• Small and medium scales businesses

Our competitive advantage

Despite the fact that private equity investment strategies give huge returns on investment, it is indeed risky venture. For you to survival as a private equity firm, you should be able to come up with workable investment strategies; strategies that will help you attract the required cash/capital and above all you should be a good risk manager and one that can spot a potential thriving business from afar.

We are quite aware that to be highly competitive in the industry means that we should be able to give good returns on investments to our clients, turn around the fortunes of a dying company for good , spot potential successful business ideas and invest in them, deliver consistent quality service, our clients should be satisfied with our investment strategies and we should be able to meet the expectations of our clients.

Thomas McKenzie® Private Equity Firm, Inc. might be a new entrant into the Private Equity, Hedge Funds & Investment Vehicles industry in the United States of America, but their management staff are highly qualified portfolio management experts in the United States. These are part of what will count as a competitive advantage for us.

Lastly, our employees will be well taken care of, and their welfare package will be among the best within our category in the industry, meaning that they will be more than willing to build the business with us and help deliver our set goals and achieve all our aims and objectives.

9. SALES AND MARKETING STRATEGY

Sources of Income

Thomas McKenzie® Private Equity Firm, Inc. is established with the aim of maximizing profits in the Private Equity, Hedge Funds & Investment industry and we are going to ensure that we do all it takes to attract clients on a regular basis. Thomas McKenzie® Private Equity Firm, Inc. will generate income by offering the following investment related services;

10. Sales Forecast

One thing is certain, there would always be accredited investors, small and medium scale businesses and wealthy individuals who would need the services of tested and trusted private equity firms.

We are well positioned to take on the available market in Medford and other key cities in the United States of America and we are quite optimistic that we will meet our set target of generating enough profits from our first six months of operation and grow the business and our clientele base.

We have been able to examine the Private Equity, Hedge Funds & Investment industry, and we have analyzed our chances in the industry and we have been able to come up with the following sales forecast. Below is the sales projection for Thomas McKenzie® Private Equity Firm, Inc., it is based on the location of our business and the wide range of investment management services that we will be offering;

• First Fiscal Year: $750,000
• Second Year: $ 1.5 Million
• Third Year: $3 Million

N.B : This projection was done based on what is obtainable in the industry and with the assumption that there won’t be any major economic meltdown and there won’t be any major competitor offering same services as we do within same location. Please note that the above projection might be lower and at the same time it might be higher.

• Marketing Strategy and Sales Strategy

As a business that aims to stay at the top of our game and generate consistent income, our sales and marketing team will be recruited base on their vast experience in the industry and they will be trained on a regular basis so as to be equipped to meet the overall goal of the organization.

We will also ensure that our return on investment and excellent job deliveries speaks for us in the marketplace. Our goal is to grow our private equity firm to become one of the top 20 private equity firms in the United States of America.

Which is why we have mapped out strategies that will help us take advantage of the available market and grow to become a major force to reckon with not only in the Medford but also in other cities in the United States of America. Thomas McKenzie® Private Equity Firm, Inc. is set to make use of the following marketing and sales strategies to attract clients;

• Introduce our business by sending introductory letters alongside our brochure to corporate organizations, startups, accredited investors, entrepreneurs and key stake holders in Medford and other cities in the United States
• Advertise our business in relevant financial and business related magazines, newspapers, TV and radio stations.
• List our business on yellow pages’ ads (local directories)
• Attend relevant international and local finance and business expos, seminars, and business fairs et al
• Create different packages for different category of clients in order to work with their budgets and still deliver good returns on investment
• Leverage on the internet to promote our business
• Engage direct marketing approach
• Encourage word of mouth marketing from loyal and satisfied clients

11. Publicity and Advertising Strategy

The uniqueness of this industry is such that it is the result they produce that helps boost their awareness. Private equity firms are strategic when it comes to inviting investors to invest in a project or when it comes to acquiring a struggling company.

It will be out of place to boost your private equity firm if you have not proven your worth in the industry. If you have successfully proven that you have what it takes to operate a successful private equity firm, then you next port of call is to strategically engage the media to help you promote your brand and also create a positive corporate identity.

We have been able to work with our brand and publicity consultants to help us map out publicity and advertising strategies that will help us walk our way into the heart of our target market. We are set to take the industry by storm which is why we have made provisions for effective publicity and advertisement of our private equity firm.

Below are the platforms we intend to leverage on to promote and advertise Thomas McKenzie® Private Equity Firm, Inc.;

• Place adverts on both print (community based newspapers and magazines) and electronic media platforms
• Sponsor relevant community based events/programs
• Leverage on the internet and social media platforms like; Instagram, Facebook, twitter, YouTube, Google + et al to promote our brand
• Install our billboards on strategic locations all around Medford.
• Distribute our fliers and handbills in target areas
• Ensure that all our workers wear our branded shirts and all our vehicles are well branded with our company’s logo.

12. Our Pricing Strategy

Private equity firms are known to generate income from various investment portfolios hence there are no pricing models for this type of business . But on the other hand, they tend to negotiate with their financial partners on percentage whenever they invest their hard earned money in an investment vehicle handled by a private equity firm.

At Thomas McKenzie® Private Equity Firm, Inc. we will ensure that we give good returns on investment (ROI) and always maximize profits for the business.

• Payment Options

At Thomas McKenzie® Private Equity Firm, Inc. our payment policy is going to be all inclusive because we are quite aware that different members prefer different payment options as it suits them but at the same time, we will ensure that we abide by the financial rules and regulation of the United States of America.

Here are the payment options that Thomas McKenzie® Private Equity Firm, Inc. will make available to her members;

• Payment via bank transfer
• Payment via online bank transfer
• Payment via mobile money
• Payment via check
• Payment via bank draft

In view of the above, we have chosen banking platforms that will enable our members make payment for their service charges monthly and investment stake without any stress on their part. Our bank account numbers will be made available on our website and promotional materials.

13. Startup Expenditure (Budget)

The cost of starting a private equity firm is in the two fold; the cost of setting up the office structure and the capital meant for investment. The amount required to invest in this line of business can range from 1 million US dollars to even multiple millions of dollars. So you must employ aggressive strategies to pool such cash together.

As regards the cost of setting up the office structure, your concern should be to secure a good office facility in a busy business district; it can be expensive though, but that is one of the factors that will help you position your firm to attract the kind of investors you would need. This is the financial projection and costing for starting Thomas McKenzie® Private Equity Firm, Inc.;

• The total fee for incorporating the Business – $750.
• The budget for basic insurance policy covers, permits and business license – $2,500
• The Amount needed to acquire a suitable office facility in a business district 6 months (Re – construction of the facility inclusive) – $40,000.
• The cost for equipping the office (computers, software applications, printers, fax machines, furniture, telephones, filing cabins, safety gadgets and electronics et al) – $5,000
• The cost for purchase of the required software applications (CRM software, Accounting and Bookkeeping software and Payroll software et al) – $10,500
• The Cost of Launching your official Website – $600
• Budget for paying at least three employees for 3 months plus utility bills – $10,000
• Additional Expenditure (Business cards, Signage, Adverts and Promotions et al) – $2,500
• Investment fund – $1 Million Dollars
• Miscellaneous: $1,000

Going by the report from the market research and feasibility studies conducted, we will need $150,000 excluding $1M investment capital to successfully set up a medium scale but standard private equity firm in the United States of America.

Generating Startup Capital for Thomas McKenzie® Private Equity Firm, Inc.

Thomas McKenzie® Private Equity Firm, Inc. is owned and managed by Thomas McKenzie. He decided to restrict the sourcing of the startup capital for the business to just three major sources.

• Generate part of the startup capital from personal savings
• Source for soft loans from family members and friends
• Apply for loan from the bank

N.B: We have been able to generate about $50,000 ( Personal savings $40,000 and soft loan from family members $10,000 ) and we are at the final stages of obtaining a loan facility of $100,000 from our bank. All the papers and documents have been duly signed and submitted, the loan has been approved and any moment from now our account will be credited.

14. Sustainability and Expansion Strategy

The future of a business lies in the number of loyal customers that they have, the capacity and competence of their employees, their investment strategy and business structure. If all these factors are missing from a business, then it won’t be too long before the business close shop.

One of our major goals of starting Thomas McKenzie® Private Equity Firm, Inc. is to build a business that will survive off its own cash flow without the need for injecting finance from external sources once the business is officially running. We know that one of the ways of gaining approval and winning customers over is to give investors good returns on their investments.

We will make sure that the right foundation, structures and processes are put in place to ensure that our staff welfare are well taken of. Our company’s corporate culture is designed to drive our business to greater heights and training and retraining of our workforce is at the top burner of our business strategy.

As a matter of fact, profit-sharing arrangement will be made available to all our management staff and it will be based on their performance for a period of three years or more as determined by the board of the organization. We know that if that is put in place, we will be able to successfully hire and retain the best hands we can get in the industry; they will be more committed to help us build the business of our dreams.

Check List/Milestone

• Business Name Availability Check : Completed
• Business Incorporation: Completed
• Opening of Corporate Bank Accounts: Completed
• Opening Online Payment Platforms: Completed
• Application and Obtaining Tax Payer’s ID: In Progress
• Application for business license and permit: Completed
• Purchase of Insurance for the Business: Completed
• Securing a standard office facility in Medford – Oregon: Completed
• Conducting Feasibility Studies: Completed
• Generating part of the startup capital from the founder: Completed
• Applications for Loan from our Bankers: In Progress
• Writing of Business Plan: Completed
• Drafting of Employee’s Handbook: Completed
• Drafting of Contract Documents: In Progress
• Design of The Company’s Logo: Completed
• Printing of Promotional Materials: Completed
• Recruitment of employees: In Progress
• Purchase of software applications, furniture, office equipment, electronic appliances and facility facelift: In progress
• Creating Official Website for the Company: In Progress
• Creating Awareness for the business (Business PR): In Progress
• Health and Safety and Fire Safety Arrangement: In Progress
• Establishing business relationship with vendors and key players in the industry: In Progress

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Start » strategy, how to attract a private equity firm to invest in your business.

Learn how to make your business attractive to private equity firms with this how-to guide.

For a small business eager to grow in capacity and reach, private equity firms can provide the necessary support and capital to reach key organizational goals. Here is a brief overview of how to find and connect with private equity firms and ultimately get them to invest in your business.

What is a private equity firm?

Private equity is a form of capital investment that entrepreneurs can use to grow their businesses. Private equity is a viable pathway for small business owners wanting to access capital and funding by providing the opportunity for investors to directly invest in their companies. Private equity firms can contribute to businesses with investments, seed funding, loans, and other support systems. Growing businesses can benefit from private equity firms because they provide a safety net, capacity for growth, and opportunity for experimentation.

Private equity investors are institutional and accredited investors with the capacity to delegate a large amount of money to smaller companies, so small business owners without an initial public offering (IPO) often consider this type of funding.

[Read more: How to Choose the Right Private Equity Firm for Your Business ]

How to attract private equity investors

If you’re interested in private equity to fund your business, here are a few ways to make your business attractive to potential investors.

Create a detailed business plan

Having an effective business plan is the best way to communicate with potential investors and funders about your company’s goals, current operational structures, and capacity for return on investments. Your business plan should answer any initial questions investors may have and outline the next steps.

There are many types of business plans to consider when writing yours. The most common business plan types are:

• A traditional business plan: The traditional business plan offers a thorough and in-depth view of your company. The plan typically includes an executive summary, company description, market analysis, organization and management outline, service or product line, marketing and sales information, funding requests, and financial projections, and it usually closes with an appendix. This detailed overview allows investors to understand the goals for your business and how you will achieve them.
• A lean business plan: The lean business plan is usually an outline or one-pager that businesses use as an overview of their company. Leveraging charts and graphics, these types of business plans touch on key partnerships, activities, resources, value propositions, customer relationships, and more.

[Read more: How to Write a Startup Business Plan ]

Growing businesses can benefit from private equity firms because they provide a safety net, capacity for growth, and opportunity for experimentation.

Protect your intellectual property (IP)

As you're building and innovating your business, you must secure its value by protecting your intellectual property, which includes intangible creations like domain names and company designs. Protecting your IP with trademarks, patents, copyrights, and the right internal operations will reassure private equity firms that you’ve taken the proper steps to secure your business assets.

Demonstrate your market potential

Attract investors by demonstrating your competitive advantage, market potential, and opportunity for financial returns. Investors evaluate a business’s market potential through its potential revenue of $300 to $500 million, its edge over competitors, its business model with profit margins of at least 50%, and its reputable and effective CEO.

Maintain detailed records

Keeping and maintaining detailed records of your business is essential for the business’s growth as well as appealing to investors. This can be information regarding business inception, operations, finances, organizational history, and more. By updating and keeping track of these records, you’ll attract investors by showing commitment, reliability, and strong management. Keep track of these records through databases, archives, and other online tools.

Outline an exit plan

Private equity firms usually support businesses for an average of five years. This is to provide the business with enough capital either to prepare for an IPO or to be purchased by another company. By providing investors with an exit plan pathway, businesses are able to take that next step.

Such steps may include:

• Selling shares as part of the IPO.
• Securing a strategic acquisition or, in other words, selling your business to another suitable company.
• Allowing private investors to sell their stakes in the business to another private equity firm.
• Repurchasing equity states from private investors.
• Liquidizing company assets (typically as a last resort).

To learn more about how to successfully pitch investors, read our complete checklist for startups.

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Private Equity Firm Business Plan

Published Mar.20, 2017

Updated Apr.23, 2024

By: Shawn Jensen

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Table of Content

A private equity firm is an organization that invests in new ventures that it sees potential in. Once these companies are fruitful, the firm gets a return on their investment. Sounds quite simple but there is a lot more to it.

Once you think of your new business idea and choose to open a private equity firm you may still find yourself thinking in actuality how to start a private investment company and an elaborate business plan can really help in this case. To help people going through the same dilemma, OGS Capital is there with the range of sample private equity firm business plan s that can aid you formulate your personal one and that can assist you with learning how to start a particular private equity firm business plan . If you want a custom plan written then the team at OGS Capital is fortunate to have a highly qualified staff that will provide you with a detailed and well-researched plan and that too in your provided deadline

How to start a private equity firm?

Private equity firm is often criticized for the fact that they make profit and formulate the firm put the amount in more beneficial areas by ending current jobs. While this may seem like a good approach, you have to realize that there are better approaches that don’t come at the cost of terminating the paid position. The most successful and established businesses produce more paid positions by re-establishing companies on the brink of collapse but that have a good premise behind them. When it comes to actually starting your equity firm to get the best out of it, you should consider the following things:

• Form the right team: Putting the right team is crucial. Investors want to see a team that has worked together, and that too in a good way.
• Give yourself some time: Give your best and show your full potential but do not expect to bloom to the fullest in a short time. Give it 3 to 5 years.
• Keep Track of Balance Sheets: Keep track your balance sheets and income flow statements.
• Give Focus to Stockholder: The center of your focus should be the stockholder, not the stock market.
• Create a Winning formula and stick to it: Once you have come up with a good operational and advertising strategy have faith and stick to it, don’t change course midway.

How OGS Capital can help?

What sets OGS Capital apart from other private equity firm business plan consultants of its sort is the highly experienced team behind it their sole aim to help people. The OGS Capital team consists of a bunch of professionals that have the kind of knowledge that makes the sample business plans very informative and that help in getting you the right idea about whatever private equity firm business plan you seek. Our main focus is helping ambitious individuals establish their private equity firm business plan . We want to take your business idea and help you turn it into the successful venture it deserves to be.

OGS Capital does not just work to get the job done, but we want to ensure that we do it in the best possible way so that the client is happy and gets the results they are looking for.

An equity firm is a company or an private equity firm business plan that provides financial cooperation on easier terms. You can say that it helps a startup or a new venture by investing in the private equity of that business. This is done by a range of financing strategies. So basically equity enterprise is a financial sponsor that will help your firm grow and prosper by funding you.

To do all of this a private equity firm raises giant amount of wealth that supply the equity contribution for all these kinds of transactions. So, what do these equity companies get as a result? Well, private equity firm in return for all of the invested amount receive a cyclic management amount along with some share in all the monetary gain particular business that they invest in earns. The private equity firm in this way acquire substantial amount of shares in an allocation, and then they figure out ways to increase the worth of the invested amount. They receive amount on all their investments by the following ways:

• IPO: In this situation assets of the client’s firms are offered to the public, which normally provides a partial asset to the equity firm which is sponsoring financially and along with the general citizens. More shares can later be sold too.
• Merging or Acquiring the new firm: In this situation a company is sold to another firm in the form of cash or shares, constituting a newly merged firm you can say.
• Recapitalization: In this situation, the earned amount is divided amongst all the firm’s shareholders, financial benefactor and the private equity funds are gotten from all the flow of income generated by the enterprise or in some cases by other securities to provide amount for the distribution.

When you are starting private equity company, you have to look for the motivation and the reasons as to why exactly are you jumping into this equity venture? Someone who has a knack for putting in money and has a nice amount well-established connections should go ahead and start a private equity firm. Why do we suggest it? Well for someone like this, a venture of this sort can bring in a lot of economic wealth, the job can be a bit demanding, but it has a lot of benefits that make up for all the challenging work.

Starting any new venture or firm especially first requires you to think it out thoroughly and to devise a road map of each step that you are likely to encounter during the course of establishing that private equity firm business plan . Whether it is an already established practice in the industry or has an industry of its own or if it is just a brilliant completely new idea that you want to implement, you first require a blueprint. This blueprint or roadmap in industry terms is called a private equity firm business plan , and today we will be looking at how to start with your very own private equity firm business plan or your very own equity firm.

Major Guidelines on What to Research Beforehand:

So if you are wondering how to start a private investment company, then you would want to research the following:

1. Gather data about the business identified:

Now that you are done with identifying the equity industry, and you have come to learn your exact place in it, then comes the tougher but more interesting part, this step involves conducting Internet research or talking to concerned people and getting all the facts figures and statistics of the industry out of all avenues possible.

The private equity industry is growing with the passing day and has become an essential part of the possession management side of the market. With an increase in demand of organizational  investors, the need for asset and incoming money management has increased considerably. Over the next few years the investing party will enlarge their money allocation to other schemes.

So you should collect facts and stats about how is the growth occurring, at what rates and how much investment is being made and how many people are putting their earned money into private equity firms.

2. Conducting Market Feasibility Research:

Next step is checking the trading status for equity venture along with conducting research on the feasibility of the equity trade and how will this venture assist you. Following things come under this:

• Making Demographics and Psychographics: Normally, a private equity firm forms collection of huge amount of cash and then uses that to buy different kinds of businesses. The aim here is to buy these businesses and to sell them at a profit in a matter of few years. So they often target small startups or businesses that are on the verge of breaking but have a good idea behind them or are in accordance with the industry trends. This relation to the trends in this field ensures that the very strong return on the contributed money will be made. So all the crucial most important points of the aimed firm are considered, which includes the merchandising, monetary and lawful aspects.
• Finding all the perfect spots in the Field: A private equity firm can have a large quantity of comfortable spots in the trade. Figure out what suits the best for your interests and what is the place where you feel like you have the ability to benefit the most out of. This depends on the magnitude of your private equity firm, your investment scheme and how you have been planning to carry out transactions in the industry. This is important because concentrating on finding a place in the industry will help pinpoint your drive towards achieving it and move your firm towards success. You can go for private equity investment in healthcare, in agriculture, shipping, airlines, science, and technology, education and insurance. Pick the one that fits your particular situation perfectly.
• Finding out potential competitors and the level of competition: Since the private equity firm industry has become a lot more famous in the past decade, quite a large number equity firms are coming into it and finding a spot. This results in the fact that the industry is becoming increasingly competitive. What you are required to do is to find out how you fit in this competitive industry and you have to identify the level of this competition. Earning a name and getting famous in the equity industry is a tough task, it will not happen overnight, you will have to give it some time and then work as hard as you can to reach an acceptable place. So make a list of your contenders, and then study their patterns and strategies.
• Conduct economic analysis: In this equity market, all the fiscal firms get the collection of funds from various investors, however all of these are distinguisable in one way or another. You have to rank them in order of evaluated assets that are being managed. Since the equity industry has expanded in the past few years so has the AUM. In the future the private equity firms will be responsible for generating even more income in the equity industry, so conduct an economic analysis of how different firms in the industry are doing. This might not include just private equity firms but other categories of firms in the industry as well, such as, hedge companies and alternative investment companies.
• Starting your firm from scrape or purchasing it: You have to build a very strong brand that stands out from the rest. So to be productive, you have to choose what is better for you. Should you start your own new brand, or buy a permit of the business that already has created some brand awareness.
• Assess Obstacles and Menace of Starting a Private Equity Firm: Since there is a big number of triumphant private equity firms these days, you will face a lot of challenges. So, you have to conduct an analysis and assess what the potential threats to your private equity firm that put you in a tough spot are. These challenges can be anything like defining a good equity firm strategy or establishing what investment vehicle you are going to choose, determining a fee structure, and the biggest thing that can act as a deal breaker if not done properly is raising funds and determining a fee structure for all your potential clients.

3. Taking Care of All The Legal Aspects:

One overlook on the part of legal aspects and you can find yourself in a tough spot. So you have to look at all the legal aspects carefully, and you have to make sure that you don’t miss a single thing that can be used against you later on. Here are the main things to do in this case:

• Finding the Best Legal Entity: A private equity firm acts as a partner or legally responsible firm for a limited amount of time. You will decide where investments go and where they come from. But the stock holders will have a part in the decision of which businesses that your private equity firm would have provided the funding for the private equity firm business plan .
• A Unique Name: Your name will set you aside from all the other firms in an aside, and this is how you will be legally enrolled. So think of a name that catches the eye, and that is something that will attract your prospective investors will find good and trustworthy.
• Choosing The Best Possible Insurance Plan: For a private equity firm, like most other equity companies out there, choosing an insurance plan is important. Discuss with all your partners and choose the insurance plan that suits your equity venture the best. There are tons of kinds such as umbrella insurance, Property insurance, Errors and omissions insurance and General Liability insurance, these help in case of bad economic events, such as bankruptcies, fallout with investors, and problems with personal assets of managers and employees. So this part has to be carefully considered.
• Trademarking your Brand and Protecting your Intellectual Property: Your intellectual property is a child of your creative juices, so it needs to be protected at all costs. Make sure you get on to protect the property of your private equity firm and file for it right away, Trademark everything right away. Patent your equity enterprise’s logo, your company name, and all other necessary documents.
• Getting a Professional Certification if needed: If the need arises, you have to get a proper certification in the area of private equity. These certifications make a point that you know what you are doing, and you are certified to do so. Other than that it will also help you comprehend the trade at a deeper level and will help you in various legal aspects. Some of these certifications include private equity expert, CFA etc.
• Gathering all the legal documents that are needed: Now comes the part where you collect all of the legal documents that are essential in legally starting a private equity firm. This consists of financial documents as well. Examples of these documents are plan, license, an agreement, Capitalization table, corporate minutes, business pitch deck, article of agreement and a few others.

4. Identifying your industry and its occupants:

First of all, you need to figure out exactly what is the exact area in which you want to enter like, and what other categories or group of firms come under it that you will have to deal with. For the private equity firms, the field is composed of finance-related firms and other funded options such as equity firms and others that deal in finances of different businesses. These companies benefit on the basis of all the return they get on their money that was invested. They help businesses and startups in establishing.

The trade does not include all fiscal and funding firms. Some of the companies that the trade excludes are coverage firms, worker benefit firms and real estate franchises.

Now that you have done all your preparation and you have a nice idea on all legal, economic and industry details of the equity venture, you can put them together in the private equity firm business plan. This will be done in a way that shows you have an idea about what you are doing and you are going to do it in the best possible way.

What to consider before STARTING A PRIVATE EQUITY FIRM?

Without a doubt, the first step in starting private equity company is getting done with an equity venture business plan. Not only will it help you in clearing everything up and mapping out guidelines it will also help you in presenting your idea to potential investors so it is a very important task and one that must be taken head on with a lot of research and serious interest.

One thing you have to realize is that just writing a private equity venture business plan is something that will get you immediate success. What gets you success is when you take all the information out of it and take full on advantage of it by implementing everything you mentioned with full force and might.

Now that we have established that when it comes to establishing an equity corporation, how to start a private equity firm, in particular, the first step is making a detailed, proposition covering everything in detail. If you are worried about what exactly constitutes a good business proposition that can wow people, and that can act as a booster for your private equity firm. Then do not worry at all, later on, we are going to describe the levels in composing the perfect proposal of a private equity firm to inspire you to create a great one for your own firm. For that first of all you have to be completely sure of what a private equity firm actually is, look into other equity firms and figure out what they are.

Starting private equity company first requires starting with the equity enterprise proposal. This is what will aid you to formulate the comprehensive proposition for the private equity firm and communicate it in a way that attracts all prospective investors to your firm. This will assist you in actually establishing the private equity firm and to completely apprehend the situation. For this you have to find out the answers to the following questions:

• Before wondering how to start a private equity firm, consider the target trade of your firm’s service and how exactly they will be targeted?
• Will there be involvement of some other business or firm in starting your private equity firm?
• What is different, that will attract the target market to your firm to get investment?
• How much time will it take in starting a private equity firm?
• What is the technical and office equipment required and how will it be gathered?
• What should the main team include to get the most success?

Writing a private equity firm business plan

Now this is a very important part of starting a private equity firm and will tell you how to start a private equity firm, and this is what we are here to guide you for. If you have a solid knowledge about all the things discussed in the previous section and have done all your research in the proper way on all the points discussed before, then writing a proposition for the equity enterprise will be a piece of cake for you. Since it is just putting together complete stuff that you have researched, and you have thought about like your objectives.

The equity enterprise plan will include a brief report of what you private equity firm plans to do, what kind of investments will it offer, how will they be different from others of their kind. It will also include a marketing analysis section. Your promotional strategy which also includes how you conduct advertisement and how will you reach people, it will also contain a brief reporting on your target trade.

Since a proposition also acts as a blueprint for your private equity firm business plan so, sometimes it has to include structural information about the equity business as well, for example, the organizing team of the private equity firm and stuff like how will all your ideas will be implemented and how much cost they will take. This helps put your ideas to work later on.

Another thing you have to take care of while composing your private equity firm business plan proposition is predicting the destiny of the equity company financially and socially. Make calculations like monetary flow, depreciation of things over time and the life of your funds, and how exactly these funds will grow with the passage of time.

It also includes an administrative synopsis which will merge everything together and will put everything in perspective by summarizing it you can say.

To help explain this further here is sample template for an equity venture proposal and which will give you an idea about how it should be written and what will it include.

Sample Template for Private activity firm Business plan

If you want to know how to start a private investment company or how to write a proposition for it the following text will give you an idea:

Write an administrative synopsis

This is the most important part of the plan, some investors form an idea about your entire business based on these two pages. So put a lot of effort into making an administrative synopsis for your private equity firm. Like the name suggests this section will summarize everything about your private equity firm, the potential startups or businesses you will fund, the basic genre of the company, you’re most probable clients and how you are intending to achieve everything you are setting out for in a way that you stay distinctive from others in your industry.

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Write a Company overview

In this section, you should write about the current private equity firm and how you fit into the situation. Briefly explain your entire private equity firm, an interpretation of all the functional facet of your equity company and what services will it provide. Begin with intro of the private equity firm, explain it a little then go ahead and write some basic facts. For example, what is the significance of a private equity firm in this day and age? In which way has the private equity trade increased financially at such a rapid pace over the last ten or more years that it is the perfect time to open a private equity firm of your own? Include how you have planned to gain advantage from the private equity firm and how it will assist you to set apart from all the competitors. Write how you will operate the equity enterprise.

Write Vision Statement, Mission Plan and Aim

A vision statement is a must for any booming venture. A strong vision statement not only helps form a vision for your private equity firm but has a strong impact on whoever comes across it. Your vision could be something along the lines of this: “to start a private equity firm that adds value to the financial funding approach in the private investment trade by acting as a pioneer in helping solve the world’s economic challenges.” Your objective should be to attain all your goal so give a short description of that. Your mission statement and vision help drive business strategy in the correct direction so clearly, mention them along with your aims.

Write about the business structure

A business structure can make or break the private equity firm business plan . It can be of no use if the structure acts as a catalyst for collapse. So clearly write down all the roles and responsibilities of all the central positions in your private equity firm. You should recruit the perfect team, and new managers looking to make a career stand a better chance of collecting money or equity. If the team has formed out of a successful firm then the investors will want to see that the team includes several individuals that have already worked together in the past and are now speaking on the same strategy now. Write about the team and essential responsibilities of all posts of the equity business. For example, the role of the chief executive will be to recruit and select individuals for jobs, and for searching and picking potential investors and firms to buy in. Specify the previous experience of all your team members as well and mention if they have worked together before.

You can write about the organizational structure of the private equity firm business plan in the form of a flow chart in order of flow of power. You also have to include the organizational budget that can help show the investors briefly how the budget is going to be distributed and if they like it then that shows that you have budget management skills, so budget wisely.

Write the Strategic and Promotional Analysis

This section contains an analysis of the equity market that you are diving into. By analyzing the trade and how it is composed and your scheme of diving into that trade. Include the following things in this section:

• Fiscal Outlook: This section should contain details of the investment management. It can include the prospective customers and the competitiveness that the private equity firm faces. Currently, the monetary state of the trade in the US, for example, is moderate.
• Trade Analysis: This includes identification of the trade that a private equity firm is a part of. Once the trade is identified, you have to write about what the trade is like some factual words and numbers about it, like the yearly income for a regular employee of the equity company. What firms and subcategories have a place in this industry and how does everything link together. In this particular case, mention the investment management trade of which a private equity firm is a part of. So you write about the place of the new venture in a particular country and how is it doing.
• Target Trade: Include the demographics related the equity market that your private equity firm will be targeting. This can be a categorized table with trade areas and categories that will be targeted using your private equity firm business plan or your potential clients. As far as private equity firm is concerned these funds are targeted to only few individuals, but it has a high rate of return.
• Competitive Analysis: This section is critical. This is where you write about your potential competitors once you enter the industry and how tough of competition will these competitors offer. In the financing industry, the size has grown considerably over the past decade and this is why the competition has also increased. One drawback is that this results in a small barrier to entry into the this trade. The expected expenses to begin the equity venture are, therefore, low.

Write your Marketing Plan

This includes how exactly you will present your equity venture to all your potential customers or your target market. While private equity marketing has been around for a long time, digital marketing has made it easier and has acted as a crucial key to marketing anything. It is easier to track all your targets using it, and it makes all your jobs a lot easier for you. A private equity firm should have extensive marketing done to ensure that it reaches all its targeted clients. Below is an overview of what should be included in this section:

• Marketing objectives: This includes what you intend to attain using your marketing, for example, a private equity firm should intend to get an online presence by making their site and putting venture’s name along with all essential information on their site. Another thing it should do is to determine relationships with other investment counselling services within their reach.
• Marketing Strategy: This should briefly tell how exactly the company has programmed to advertise their private equity firm. A private equity firm can do so by hiring a capital introduction firm that helps them in getting introduced to prospective It should also introduce itself to startups who will be interested in their services once they find out about them. Another marketing strategy is the formation of a website that helps form an online presence and helps in reaching all the targeted demographics.
• Pricing Strategy: In this portion, the pricing that you will charge for your funding services will be written. Do not forget to provide the maximum information you can about your pricing so that it gives anyone reading the plan the elaborate concept about your charges. However, if you are providing quite a few services, shorten your list based on categories. This section in any case should not span more than one page of the document. Keep it short yet full of information.

Write a Financial Plan

As the name suggests this section will help in elaborating the allotted amount and finances of your private equity firm in detail. A sound financial strategy is what exactly will help boost your private equity firm and will assist you in getting maximum return on all your investments, so it should be carefully thought out and clearly put together. Securing funds for the venture is another big issue and a quite tough thing to do, write down who you plan to do that as well, how you think you will be able to attain the required finances to begin your private equity firm. This section should contain the following things about our private equity firm:

• Theoretical Calculations: The first item to mention is the things you already feel like you know for sure. Like total monetary annual return it will earn on its . Also mention the number of equity funds the owner of the venture will get along with and the yield expansion rate of the firm annually.
• Source of Funds: In this portion of the proposition, you have to write down where you will be getting all your required funds from. This involves equity contributions such as management of gained finances, equity financing, bank and lenders funds. You can list these sources or write them in the form of a table.
• General Assumptions: For the coming years, you can make assumptions such as short-term interest rate, long term interest rate, federal tax rate, and personal tax rate and state tax rates in particular year. These assumptions are pretty generic.
• Profit and Loss Statements: Give the profit and loss statements. You can include comparison charts as well.
• Cash Flow Analysis: Give the yearly cash flows, charts of cash inflows-outflows and balance.
• Balance Sheet: Includes the balance sheet and can contain charts as well.

Advertisement Strategy

Advertisement of any new venture is critical, and this is the sole way of telling how the new venture will reach the audience. To captivate the audience to become customers, you have to come up with creative methods to let them know that your firm is the new one in town and why will it be perfect for them. Therefore like any other firm or company a private equity firm also requires a strong advertising strategy, you have to come up with a unique way of approaching customers that they will like. Once you come up with the strategy you have to write about it, so investors know you have that creative side that will help flourish the business. Here are bunch of things you ought to do to come up with an effective advertising strategy:

• A unique is what stands out in people’s mind even if they have heard of the name rarely. People tend to remember unique names so try to come up with different yet relevant names, but it should not be too difficult.
• Make unique business cards that you can hand out to all startups, small businesses and investors you are interested in working with. This way they know how to contact you the moment then need to get in touch with a private equity firm.
• Create relationships with all potential investors and startups you will be investing in. This can be done by going to investment related seminars or by going to networking events.
• This is the age of social media, all business big or small have to have a good social media presence. The advertisement is done through social media these days, so focus on that, use social media to reach your target market.
• Think of unique ways to advertise with catchy tag lines and untraditional ways that catch the public eye and have them talking.

Expansion Strategy and Sustainability plan for the Private Equity Firm

Your private equity firm business plan should elaborate the sustainability strategy of your firm. The fate of your firm depends on how you plan to sustain it to have a long term successful life. Other than that you have to focus on not only maintaining the firm but over time you have to expand it as well. So, think of a strategy to expand it as well. This shows your long-term commitment to you private equity firm and how serious you are about it. Your object should be to increase the cash flows without extra investment and profit to expand it and to branch out, to make the firm bigger and better.

Since a private equity firm is a multifaceted investment firm, to expand it and sustain it a strategy that the management can opt for is to expand each segment separately by developing limited partnerships that will help attract additional capital towards the company. Making it secure and helping expand as well.

Here is a brief overview on how to get started and what to write in a private equity firm business plan.

Operational private equity firm business plan

This part of the private equity firm business plan includes the detailed list of tasks that you have to do for the operation of the company and the respective timeline that will be required for each task to carry it out. This helps stick to a schedule and helps plan out the actual establishment of the company and each milestone that comes with it. It is also a great way for investors to know that you do have a road map planned out and you have a serious attitude about diving in the investment management industry.

How can OGS Capital help you with the business plan?

If you have a bright idea, but do not really know how to achieve it then, come to us. We will not only discuss it polish your demands with you but we will work to make a private equity firm business plan for you that helps you in getting a remarkable business establishment for you that helps your venture reach the very top like it deserves it to be. All you have to do is get in touch with us, and the rest is our job.

What sets OGS Capital apart from other private equity firm business plan consultants of its sort is the highly experienced team behind it. Their sole aim to help people. The OGS Capital team consists of a bunch professionals that have the kind of knowledge that makes the sample business plans very informative and that help in getting you the right idea about whatever business plan you seek. Our main focus is helping ambitious individuals establishing their business. We want to take your business idea and help you turn it into the successful venture it deserves to be.

Here is how everything works

All you have to do is place your order with us by giving us all the necessary information. We will get to work, and we will create your project proposal within a matter of 12-24 hours. It is hard to believe, but yes we do provide an elaborate proposal in such a short time. As the project proceeds, we ask the client to fill in a questionnaire which gives us a gist of the project, and the client will get weekly updates from us so that they will be satisfied.

OGS Capital provides customers with a complete draft report, and at this point, if you feel comfortable we ask for feedback which we appreciate a lot. Since our clients are what make us, so we want to hear them out. The final draft is submitted with all issues resolved. Even if you are in a hurry and have an urgent job, you can contact OGS capital because we have the management skills and the experienced professionals that can do your work in a very short time and you can trust us with your work.

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Writing a Business Plan for a Private Equity Group

Private equity firms source capital from investors including wealthy individuals, other financial solutions, banks, pension funds, and other entities in order to aggregate these funds into highly lucrative portfolio companies. The most common structure that is used when developing a private equity firm is that the management company is an LLC that serves as a general partner within a limited partnership.

The fees that are generated from successful investments typically include a 20% cut of the profits coupled with a 1% to 2% fee on a per annum basis for the amount of money that is managed by the private equity firm. Over the past 14 years, Deutsch and Thomas has worked with a number of private equity firms as well as other related private investment vehicles to develop a business plan that showcases the types of investments we made, anticipated returns on investment, and varying revenue streams that are generated by private equity firms. We are familiar with all aspects of the marketing as it relates to targeting accredited investors.

As with all business plans we develop a Deutsch and Thomas, a private equity firm business plan that we can develop for you will feature a five year profit and loss statement, cash flow analysis, balance sheet, breakeven analysis, and all relevant business metrics. In each business plan we complete, we always provide you with all the relevant industry research, market trends as it relates to private investment vehicles, and related information regarding the private equity firm industry. We always worked closely with each of our clients to develop the business plan specific to their exact purposes. We've also developed a number of business plans for private equity groups that focus on not only portfolio companies but also new technology investments and real estate.

If you're interested in having Deutsch and Thomas develop your business plan for a private equity firm, please feel free to contact us anytime at 646-216-9844 or through the contact us form on this website.

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Business plan criteria and contents under private equity

The term ‘private equity’ (“PE”) is a generic expression for investments in equity securities in companies that are not listed on any public stock exchange. Generally, in the UK, this means shares in limited companies, although there are exceptions (such as so-called ‘vanity pics’), which are public limited companies that are not listed on any investment exchange but maintain plc status so that the term ‘plc’ may be used in the corporate name.

A PE firm is an investment manager which raises pools of capital, typically in the form of PE funds, to invest. These firms receive a periodic management fee for doing so and the share in the profits known as ‘carried interest’ from each of the PE funds it manages. Depending on the size of the fund, they are classified among Upper (>£500m), Mid (£50 – £500m) and Lower (<£50m).

There are different types of PE transactions, such as Management buyouts, Management buy-ins, Leveraged buyouts, Institutional buyouts, Venture Capital, Growth Capital, Development capital, and Secondary buyouts. The differences between the different investments mentioned are beyond the scope of this piece.

The Business Plan and financial returns

The business plan is a cornerstone requirement for any PE proposition. It is a critical document outlining management’s strategy for business, key milestones (and how these will be achieved), and an assessment of the outlook for the business within its market. PE firms are looking for companies which satisfy the following criteria, all of which should be addressed by the management team within a robust and well-structured Plan:

a) experience and committed management;

b) good products/services;

c) strong market position

d) high/predictable margins;

e) the potential to double the money within three years (generating an IRR of 25-35%)

f) running yield and the capacity for the payment of arrangement and monitoring fees; and

g) foreseeable exit opportunities.

Preparing the Business Plan is, in many ways, a balancing act. On the one hand, it must describe Target’s business and opportunity accurately and appropriately; however, it must also help sell the opportunity accurately and with proper funders. Management team members may have strength in either of these areas, but only very talented and experienced managers (or well-balanced teams) combine the two effectively.

The facts and opinions expressed in the Business Plan will, by necessity, remain those of management. Given the fundamental importance of the Business Plan to investors’ decisions to invest, the management team will be required to warrant the content of the Business Plan to the investors in the legal documentation (details outside the scope of this piece).

The standard contents of a Business Plan are as follows:

• Executive summary
• Products and Services
• Market analysis
• The management team and organisation
• The strategy
• Financial summary
• Funding requirements
• Risk assessment and sensitivity analysis
• Exit review

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Private equity comprises 85% of the total equity investment universe and can play a critical role in diversified portfolios, enhancing returns and reducing volatility.

Asset allocation has historically focused on traditional asset classes – equities, fixed income and cash instruments. However, individual investors have increasingly become interested in the potential of alternative assets – such as private equity, private debt, real estate and hedge funds – to improve portfolio performance over the long term, especially given the outlook for continued modest traditional market returns.

Alternative investments can play distinct roles in a portfolio, from enhancing return to diversifying risk to increasing income.   

Why private equity?

Private equity comprises 85% of the total equity investment universe. By only investing in public equities, individual investors are limiting their equity exposure to just 15% of the market.

The primary motivation for investing in private equity is the potential for return enhancement. Over the long term, private equity has delivered double-digit annualized returns across multiple time periods.

What is private equity investing?

Private equity investing is defined as equity investments made in companies that are not publicly listed and traded on a stock exchange. Private equity investment opportunities fall into two main categories generally characterized by the company’s lifecycle stage and how the company uses capital:

1)  Buyouts are investments in existing private companies that are expanding through growth strategies or fundamental business change.

• For example, investments may be made in businesses that are looking to expand through internal growth and generation of business efficiencies. Or, to support business strategies, such as growth through acquisitions or industry consolidation, management succession or refinancings and recapitalizations of both healthy or financially/operationally troubled companies.

2)  Venture capital is the financing of start-up or emerging companies developing new business opportunities.

• Most venture capital investing has focused on new technologies in software, telecommunications, materials, biotechnology and medical devices. In addition, many service companies and consumer-oriented businesses have been launched and developed with venture capital.
• Common strategies include seed, early stage and expansion/growth equity.

Fundamental characteristics of private equity investing

The very nature of private equity investing – whether buyout or venture capital related – defines its investment characteristics in terms of both risk and potential rewards. Investors should assess their risk appetite, cash flow needs and return requirements, and be sure that they understand and are comfortable with these fundamental characteristics of private equity:

• A long-term horizon with unique cash flow patterns: The total life of private equity fund investments typically extends over a period of 10–12 years from capital commitment to final distributions. Committed capital is not deployed immediately, as with typical investments made in the public markets. Rather, cash must be available for investment as portfolio companies are identified and their growth strategies implemented. The distributions vary in timing and magnitude over the life of the investment. Recent innovations in private equity fund structures have simplified access to the asset class, eliminating the need for periodic capital calls and reducing time horizons (see A simplified way to access private equity ).  
• Illiquidity: Commitments are generally for the long haul. Unlike many other alternative investments, private equity investments typically do not have reinvestment or redemption features. Further, for many investors, the ability to sell their private equity interest can be limited by their investment agreements. Even if investors can sell positions in the secondary market, interests generally trade at a discount and the market itself can be cyclical, further impacting pricing. Here again, new fund structures provide the opportunity for periodic liquidity, subject to constraints (see A simplified way to access private equity ).    
• The J-curve effect: The J-curve represents the pattern of returns an investor can expect to realize from a private equity fund over time, from inception to termination. A private equity fund will often show a negative return in its early years, when fees and start-up costs are incurred, and investments considered to be behind plan are written down – all prior to any returns to the investor. Investment gains will usually come in the later years as portfolio companies mature, increase in value and are ultimately exited with returns realized.
• Attractive return potential: The above characteristics define some key differences between private equity investing and public equity investing. They also explain why private equity investors anticipate a higher level of compensation for investing in private versus public equity opportunities – an expectation that private equity investing has met over the long term.

Who invests in private equity?

Qualified institutions and high-net-worth individuals typically invest in private equity through fund structures. These generally take the form of limited partnerships managed by general partners (GPs) who raise capital from investors, invest alongside these limited partners (LPs), identify and select portfolio company investments and generally have a significant level of engagement in the management of these companies. Investors also gain exposure to private equity by co-investing alongside GPs in unlisted operating companies.

Additionally, investors can access the secondary market for private equity, whereby a limited partnership or company interest is transferred from one investor to another. This market has developed and matured over time and interests are generally purchased at a discount, although the market can be cyclical and the quality of available assets varies, highlighting the importance of informed underwriting and investment selectivity.

While institutions with scale and relationships can access private equity funds and companies directly, individual investors are increasingly gaining exposure to private equity through professionally managed commingled vehicles and tender offer funds.

How should investors allocate to private equity?      

Once a prospective investor understands the essentials, the natural next question is how to allocate to private equity within a diversified portfolio. Ultimately, this comes down to how much to allocate and whether to fund a private equity allocation from traditional equities and/or bonds.     

Private equity is a potent diversifier. As illustrated in the chart below, allocating as little as 5% to a traditional 60/40 portfolio (funded equally from equity and fixed income) would have increased the return from 5.53% to 6.06% and reduced volatility from 9.94% to 9.80% – nearly a 10% increase in performance while reducing volatility 1.5% on a relative basis. Increasing the private equity allocation typically only magnifies that impact. Private equity allocations of 10% and 15% shift the portfolio further up and to the left, illustrating private equity’s ability to further increase the overall portfolio’s return and reduce volatility.

Whether the private equity allocation is funded from equities and bonds equally, equities only or bonds only, the outcomes are virtually the same.

In summary, an allocation to private equity can serve as a versatile tool within portfolios. As demonstrated in the scenarios above, a consistent theme emerges: The portfolio’s risk-adjusted profiles were enhanced relative to a traditional 60/40 portfolio by increasing returns and reducing volatility. Given private equity’s versatility and the uniqueness of individual portfolios, there is no one-size-fits-all approach to the right allocation and how to fund it. Therefore, working with a financial advisor is key.

To learn more about how private equity is managed and how individual investors can access private equity, see  A simplified way to access private equity .

About the J.P. Morgan Private Equity Group

J.P. Morgan is a global leader in investment management with $2.8 trillion in assets under management (as of 6/30/23) across equities, fixed income, liquidity and alternatives. Led by a global team of over 60 professionals operating from New York, London, Hong Kong and Mumbai, the J.P. Morgan Private Equity Group (PEG) manages $30 billion of assets on behalf of a diverse group of leading institutions and individual investors. Founded in 1980, PEG is one of the longest-standing platforms in the industry. Over the past 40+ years, PEG has cultivated a deep network of general partner (GP) relationships and sits on over 200 advisory boards. PEG’s collaborative partnerships with top-tier GPs and continued participation in primary investments also make it a preferred strategic partner for co-investment and secondary opportunities.

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Private Equity Firm Business Plan and SWOT Analysis

Private Equity Firm Business Plan, Marketing Plan, How To Guide, and Funding Directory

The Private Equity Firm Business Plan and Business Development toolkit features 18 different documents that you can use for capital raising or general business planning purposes. Our product line also features comprehensive information regarding to how to start a Private Equity Firm business. All business planning packages come with easy-to-use instructions so that you can reduce the time needed to create a professional business plan and presentation.

Your Business Planning Package will be immediately emailed to you after you make your purchase.

Product Specifications (please see images below):

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Over the past 50 years, private equity firms have become ubiquitous in finance. With the number of new businesses starting increasing each year, the opportunities for a private investment firm to find these opportunities to make investments is significant. Additionally, many people within the United States have become much wealthier over the past 20 years. As such, private equity firms provide these individuals with investment vehicles that they can use in order to indirectly make investments into potentially highly lucrative deals. There is a substantial amount of flexibility for a private equity firm as it relates to the types of investments we can make. Generally, outside of very large firms – most newer private equity groups often focus on a specific industry segment in which the principles have a substantial amount of experience. Specialization within the private equity industry has been one of the more common trends over the past 10 years given the ongoing and increased complexity for most businesses. Unlike venture capital funds, most private equity groups tend to invest in businesses that have established operations are looking for mezzanine capital before businesses are sold or taken public.

A private equity group business plan should focus substantially on how you intend to bring investors into the limited partnerships that will be formed in order to raise the capital to make investments into promising companies. Usually, a private equity firm receives a fee equal to 2% of the assets under management and 20% of all profits generated on a yearly basis. There are some variations to this fee structure, however, this is usually considered to be the industry standard. Your private equity firm business plan should include a three year to five year profit and loss statement, cash flow analysis, balance sheet, breakeven analysis, and business ratios page. It should be noted that the business plan should be geared towards the fees and incentives income generated by the firm and not by the investments themselves. If you are going to have a business plan for private equity firm, you may want to do a second one specific for the limited partnership will be holding investor funds.

Private equity firms are limited and how they can market their services to the general public. Most people that put money into these companies must consider accredited investors. As such, a when formulating the private equity firm marketing plan and attorney should be retained to make sure that all marketing strategies in compliance with FINRA a as well as the SEC.

A private equity firms SWOT analysis is usually done prior to launching operations. As it relates to the strengths private equity firm, the income that can be generated from these businesses is beyond substantial. A highly profitable private equity firm can make tens of millions if not hundreds of millions of dollars per year in fees. For opportunities, most established private equity groups will often develop additional limited partnerships in order to increase the capital base. For threats, these firms are constantly under ongoing scrutiny as it relates to investments. As these funds are regulated by both the state and federal government is imperative that a operator understand how to remain in compliance with all times. For weaknesses, once established this is pretty much diminished given that a track record goes a long way for most private equity groups.

In short, a private equity firm can be a highly lucrative business provided that the individual who starts the firm has the appropriate experience and contacts. These businesses have extremely high barriers to entry given that the individual who is considered the manager of the firm must have an extensive relationship with the number of investors that trust them to place capital to manage in illiquid investments. As such, once the appropriate reputations developed these firms can become extremely profitable over a long period of time.

Acquisition Criteria: What Every Private Equity Firm is Looking For

Private equity firms provide meaningful investment capital to growth-oriented businesses. Unlike venture capital firms, they do not invest primarily in start-ups. They focus on the leveraged buyout of companies with proven business models but which need a single round of investment and a strategic direction to get to the next level.

Businesses seeking expansion, change of investors, or even exit may benefit from private equity firms . Because they invest in companies to earn a return, they follow rigorous due diligence processes and stringent criteria for acquisition.

*Note for 2024: While the overall market was down, 2023 saw a more resilient middle market when compared to much larger ‘bulge bracket’ M&A deals. We anticipate a much stronger market for solid middle-market companies in 2024 from both Private Equity and strategic buyers.

If you’re a business owner who wants to sell in 2024, contact our sell-side Advisory team today. 

What Private Equity Firms Seek in M&A Investment Targets

Investment from private equity firms comes with conditions, clauses, and limitations. They want to ensure that they earn a good return on investment and easily divest after a few years. So, they may insist on a new business plan, members on the management board, etc.

Private equity firms thoroughly analyze the investment opportunity and research the business to understand the company’s market position, industry trends, financials, etc. Factors that help them determine if a company is a good investment target or not include:

Operation in a non-cyclical industry

• A competitive business plan
• Multiple drivers of growth
• Repeatable revenue and reliable cash flows
• Low capital expenditure
• Favorable industry trends
• Strong management team
• Clear exit strategy
• A seat on the management board
• Operational discipline.

Because they intend to own companies for many years, private equity firms prefer companies that don’t operate in volatile markets and are easier to exit. A company requiring an economic rebound to be sold, such as a retail business catering to a specific holiday, does not interest them. They opt for companies that operate in non-cyclical industries.

A Competitive Business Plan

Private equity firms want to see an ambitious and realistic business plan before investing in a company. Good sales and profitability prospects are essential, and the target company’s facts and figures must support those forecasts.

Even more specifically, private equity firms want to see at least 20 to 25 percent annual profit, which may require the company to improve EBITDA , obtain economies of scale or synergies, and earn high margins.

Multiple Drivers of Growth

Private equity firms look for companies with multiple avenues of growth , including exploring new markets, new locations, sales strategies, customer acquisition strategies, etc. They assess the company’s growth potential by reviewing factors like customer base, past successes, and the size of current and potential markets.

Repeatable Revenue and Reliable Cash Flows

Companies must have steady and reliable cash flows to enable private equity investors to meet their interest payments. Because a company requires spending to grow, however, rapid growth does not promise an influx of capital, particularly when the cost of acquisition is high. Therefore, private equity firms keep track of operating costs, costs of increasing human capital, overheads, sales, assets, liabilities, and costs associated with upgrades of software, processes, etc.

Low Capital Expenditure

Unlike venture capital investors who expect to invest multiple rounds of investment, private equity firms avoid companies that require multiple rounds of investment or are capital-intensive. Such companies receive lower valuations from private equity firms, which see them as financially risky.

Private equity firms target established companies that they believe will thrive after one investment. This affords management flexibility regarding the allocation of business capital and the operation of the business. Such flexibility offers choices to issue dividends to shareholders, grow their core operations, invest in growth and acquisitions, etc.

Favorable Industry Trends

Private equity firms prefer companies that leverage trends and disrupt technology within their respective industries because these factors result in market growth and the potential for strong equity returns. They want target companies to have plans for innovation that will transform the industry by enhancing automation, introducing AI or other disruptive technology, and adapting to changing consumer behavior, changing demographics, increasing regulations, etc.

Strong Management Team

Private equity firms do not run the businesses they buy; they are investors, not operators. They provide strategic guidance and rely on existing management to execute their operational strategies. In rare cases, they may replace current management with their own team.

PE firms look for companies with a strong organizational structure and management team with a proven record of identifying key opportunities and mitigating risks because it’s easier (and less expensive) to retain existing management than bring in a new team.

Clear Exit Strategy

When private equity firms study a company, they dedicate 50 percent of their time to analyzing the investment and the rest on how they will divest after a few years, so they have a clear idea from the beginning. If they feel that a company could be difficult to exit after a few years, they’ll likely pass on that investment opportunity.

A Seat on the Management Board

To protect their interests, private equity firms insist on being included as decision-makers within the companies they own in whole or in part. This executive-level control makes them feel more secure about their investment because they can influence management regarding the approval of changes to the business plan if needed.

Operational Discipline

Private equity firms want to see a culture of operational discipline in their target companies. They look at management will and commitment, which is the first essential step of operational discipline within an organization. Target companies should have streamlined and effective systems and processes in place to ensure sustainable revenues and growth.

Private Equity Buyers Summed Up:

Private equity firms invest in companies with the intention of creating value within a few years, after which they will sell their stake for the highest possible capital gain. Therefore, they seek businesses with clear growth potential and needing limited investment.

If your company is growing and market trends are positive, but you don’t have the fixed assets necessary to guarantee bank loans, consider selling a majority or minority stake to a private equity firm . By understanding what private equity firms are looking for, you can be in a better position to get a favorable deal.

Our sell-side M&A Advisory team helps our clients lead transactions while also acting as valuation experts and value growth advisors. Our passion for working with CEO Founders has allowed us to perfect our advisory process. Quantive has successfully executed over 150+ transactions– get in touch with our expert advisory team today to get started.

Emily Caldwell

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McKinsey Global Private Markets Review 2024: Private markets in a slower era

At a glance, macroeconomic challenges continued.

McKinsey Global Private Markets Review 2024: Private markets: A slower era

If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs, and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments.

About the authors

This article is a summary of a larger report, available as a PDF, that is a collaborative effort by Fredrik Dahlqvist , Alastair Green , Paul Maia, Alexandra Nee , David Quigley , Aditya Sanghvi , Connor Mangan, John Spivey, Rahel Schneider, and Brian Vickery , representing views from McKinsey’s Private Equity & Principal Investors Practice.

Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

Perspectives on a slower era in private markets

Global fundraising contracted.

Fundraising fell 22 percent across private market asset classes globally to just over $1 trillion, as of year-end reported data—the lowest total since 2017. Fundraising in North America, a rare bright spot in 2022, declined in line with global totals, while in Europe, fundraising proved most resilient, falling just 3 percent. In Asia, fundraising fell precipitously and now sits 72 percent below the region’s 2018 peak.

Despite difficult fundraising conditions, headwinds did not affect all strategies or managers equally. Private equity (PE) buyout strategies posted their best fundraising year ever, and larger managers and vehicles also fared well, continuing the prior year’s trend toward greater fundraising concentration.

The numerator effect persisted

Despite a marked recovery in the denominator—the 1,000 largest US retirement funds grew 7 percent in the year ending September 2023, after falling 14 percent the prior year, for example 1 “U.S. retirement plans recover half of 2022 losses amid no-show recession,” Pensions and Investments , February 12, 2024. —many LPs remain overexposed to private markets relative to their target allocations. LPs started 2023 overweight: according to analysis from CEM Benchmarking, average allocations across PE, infrastructure, and real estate were at or above target allocations as of the beginning of the year. And the numerator grew throughout the year, as a lack of exits and rebounding valuations drove net asset values (NAVs) higher. While not all LPs strictly follow asset allocation targets, our analysis in partnership with global private markets firm StepStone Group suggests that an overallocation of just one percentage point can reduce planned commitments by as much as 10 to 12 percent per year for five years or more.

Despite these headwinds, recent surveys indicate that LPs remain broadly committed to private markets. In fact, the majority plan to maintain or increase allocations over the medium to long term.

Investors fled to known names and larger funds

Fundraising concentration reached its highest level in over a decade, as investors continued to shift new commitments in favor of the largest fund managers. The 25 most successful fundraisers collected 41 percent of aggregate commitments to closed-end funds (with the top five managers accounting for nearly half that total). Closed-end fundraising totals may understate the extent of concentration in the industry overall, as the largest managers also tend to be more successful in raising non-institutional capital.

While the largest funds grew even larger—the largest vehicles on record were raised in buyout, real estate, infrastructure, and private debt in 2023—smaller and newer funds struggled. Fewer than 1,700 funds of less than $1 billion were closed during the year, half as many as closed in 2022 and the fewest of any year since 2012. New manager formation also fell to the lowest level since 2012, with just 651 new firms launched in 2023.

Whether recent fundraising concentration and a spate of M&A activity signals the beginning of oft-rumored consolidation in the private markets remains uncertain, as a similar pattern developed in each of the last two fundraising downturns before giving way to renewed entrepreneurialism among general partners (GPs) and commitment diversification among LPs. Compared with how things played out in the last two downturns, perhaps this movie really is different, or perhaps we’re watching a trilogy reusing a familiar plotline.

Dry powder inventory spiked (again)

Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown nearly 20 percent per annum since 2018. Dry powder reserves—the amount of capital committed but not yet deployed—increased to $3.7 trillion, marking the ninth consecutive year of growth. Dry powder inventory—the amount of capital available to GPs expressed as a multiple of annual deployment—increased for the second consecutive year in PE, as new commitments continued to outpace deal activity. Inventory sat at 1.6 years in 2023, up markedly from the 0.9 years recorded at the end of 2021 but still within the historical range. NAV grew as well, largely driven by the reluctance of managers to exit positions and crystallize returns in a depressed multiple environment.

Private equity strategies diverged

Buyout and venture capital, the two largest PE sub-asset classes, charted wildly different courses over the past 18 months. Buyout notched its highest fundraising year ever in 2023, and its performance improved, with funds posting a (still paltry) 5 percent net internal rate of return through September 30. And although buyout deal volumes declined by 19 percent, 2023 was still the third-most-active year on record. In contrast, venture capital (VC) fundraising declined by nearly 60 percent, equaling its lowest total since 2015, and deal volume fell by 36 percent to the lowest level since 2019. VC funds returned –3 percent through September, posting negative returns for seven consecutive quarters. VC was the fastest-growing—as well as the highest-performing—PE strategy by a significant margin from 2010 to 2022, but investors appear to be reevaluating their approach in the current environment.

Private equity entry multiples contracted

PE buyout entry multiples declined by roughly one turn from 11.9 to 11.0 times EBITDA, slightly outpacing the decline in public market multiples (down from 12.1 to 11.3 times EBITDA), through the first nine months of 2023. For nearly a decade leading up to 2022, managers consistently sold assets into a higher-multiple environment than that in which they had bought those assets, providing a substantial performance tailwind for the industry. Nowhere has this been truer than in technology. After experiencing more than eight turns of multiple expansion from 2009 to 2021 (the most of any sector), technology multiples have declined by nearly three turns in the past two years, 50 percent more than in any other sector. Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later and exited in 2021 or before can be attributed to market multiple expansion and leverage. Now, with falling multiples and higher financing costs, revenue growth and margin expansion are taking center stage for GPs.

Real estate receded

Demand uncertainty, slowing rent growth, and elevated financing costs drove cap rates higher and made price discovery challenging, all of which weighed on deal volume, fundraising, and investment performance. Global closed-end fundraising declined 34 percent year over year, and funds returned −4 percent in the first nine months of the year, losing money for the first time since the 2007–08 global financial crisis. Capital shifted away from core and core-plus strategies as investors sought liquidity via redemptions in open-end vehicles, from which net outflows reached their highest level in at least two decades. Opportunistic strategies benefited from this shift, with investors focusing on capital appreciation over income generation in a market where alternative sources of yield have grown more attractive. Rising interest rates widened bid–ask spreads and impaired deal volume across food groups, including in what were formerly hot sectors: multifamily and industrial.

Private debt pays dividends

Debt again proved to be the most resilient private asset class against a turbulent market backdrop. Fundraising declined just 13 percent, largely driven by lower commitments to direct lending strategies, for which a slower PE deal environment has made capital deployment challenging. The asset class also posted the highest returns among all private asset classes through September 30. Many private debt securities are tied to floating rates, which enhance returns in a rising-rate environment. Thus far, managers appear to have successfully navigated the rising incidence of default and distress exhibited across the broader leveraged-lending market. Although direct lending deal volume declined from 2022, private lenders financed an all-time high 59 percent of leveraged buyout transactions last year and are now expanding into additional strategies to drive the next era of growth.

Infrastructure took a detour

After several years of robust growth and strong performance, infrastructure and natural resources fundraising declined by 53 percent to the lowest total since 2013. Supply-side timing is partially to blame: five of the seven largest infrastructure managers closed a flagship vehicle in 2021 or 2022, and none of those five held a final close last year. As in real estate, investors shied away from core and core-plus investments in a higher-yield environment. Yet there are reasons to believe infrastructure’s growth will bounce back. Limited partners (LPs) surveyed by McKinsey remain bullish on their deployment to the asset class, and at least a dozen vehicles targeting more than $10 billion were actively fundraising as of the end of 2023. Multiple recent acquisitions of large infrastructure GPs by global multi-asset-class managers also indicate marketwide conviction in the asset class’s potential.

Private markets still have work to do on diversity

Private markets firms are slowly improving their representation of females (up two percentage points over the prior year) and ethnic and racial minorities (up one percentage point). On some diversity metrics, including entry-level representation of women, private markets now compare favorably with corporate America. Yet broad-based parity remains elusive and too slow in the making. Ethnic, racial, and gender imbalances are particularly stark across more influential investing roles and senior positions. In fact, McKinsey’s research  reveals that at the current pace, it would take several decades for private markets firms to reach gender parity at senior levels. Increasing representation across all levels will require managers to take fresh approaches to hiring, retention, and promotion.

Artificial intelligence generating excitement

The transformative potential of generative AI was perhaps 2023’s hottest topic (beyond Taylor Swift). Private markets players are excited about the potential for the technology to optimize their approach to thesis generation, deal sourcing, investment due diligence, and portfolio performance, among other areas. While the technology is still nascent and few GPs can boast scaled implementations, pilot programs are already in flight across the industry, particularly within portfolio companies. Adoption seems nearly certain to accelerate throughout 2024.

Private markets in a slower era

If private markets investors entered 2023 hoping for a return to the heady days of 2021, they likely left the year disappointed. Many of the headwinds that emerged in the latter half of 2022 persisted throughout the year, pressuring fundraising, dealmaking, and performance. Inflation moderated somewhat over the course of the year but remained stubbornly elevated by recent historical standards. Interest rates started high and rose higher, increasing the cost of financing. A reinvigorated public equity market recovered most of 2022’s losses but did little to resolve the valuation uncertainty private market investors have faced for the past 18 months.

Within private markets, the denominator effect remained in play, despite the public market recovery, as the numerator continued to expand. An activity-dampening cycle emerged: higher cost of capital and lower multiples limited the ability or willingness of general partners (GPs) to exit positions; fewer exits, coupled with continuing capital calls, pushed LP allocations higher, thereby limiting their ability or willingness to make new commitments. These conditions weighed on managers’ ability to fundraise. Based on data reported as of year-end 2023, private markets fundraising fell 22 percent from the prior year to just over $1 trillion, the largest such drop since 2009 (Exhibit 1).

The impact of the fundraising environment was not felt equally among GPs. Continuing a trend that emerged in 2022, and consistent with prior downturns in fundraising, LPs favored larger vehicles and the scaled GPs that typically manage them. Smaller and newer managers struggled, and the number of sub–$1 billion vehicles and new firm launches each declined to its lowest level in more than a decade.

Despite the decline in fundraising, private markets assets under management (AUM) continued to grow, increasing 12 percent to $13.1 trillion as of June 30, 2023. 2023 fundraising was still the sixth-highest annual haul on record, pushing dry powder higher, while the slowdown in deal making limited distributions.

Investment performance across private market asset classes fell short of historical averages. Private equity (PE) got back in the black but generated the lowest annual performance in the past 15 years, excluding 2022. Closed-end real estate produced negative returns for the first time since 2009, as capitalization (cap) rates expanded across sectors and rent growth dissipated in formerly hot sectors, including multifamily and industrial. The performance of infrastructure funds was less than half of its long-term average and even further below the double-digit returns generated in 2021 and 2022. Private debt was the standout performer (if there was one), outperforming all other private asset classes and illustrating the asset class’s countercyclical appeal.

Private equity down but not out

Higher financing costs, lower multiples, and an uncertain macroeconomic environment created a challenging backdrop for private equity managers in 2023. Fundraising declined for the second year in a row, falling 15 percent to $649 billion, as LPs grappled with the denominator effect and a slowdown in distributions. Managers were on the fundraising trail longer to raise this capital: funds that closed in 2023 were open for a record-high average of 20.1 months, notably longer than 18.7 months in 2022 and 14.1 months in 2018. VC and growth equity strategies led the decline, dropping to their lowest level of cumulative capital raised since 2015. Fundraising in Asia fell for the fourth year of the last five, with the greatest decline in China.

Despite the difficult fundraising context, a subset of strategies and managers prevailed. Buyout managers collectively had their best fundraising year on record, raising more than $400 billion. Fundraising in Europe surged by more than 50 percent, resulting in the region’s biggest haul ever. The largest managers raised an outsized share of the total for a second consecutive year, making 2023 the most concentrated fundraising year of the last decade (Exhibit 2).

Despite the drop in aggregate fundraising, PE assets under management increased 8 percent to $8.2 trillion. Only a small part of this growth was performance driven: PE funds produced a net IRR of just 2.5 percent through September 30, 2023. Buyouts and growth equity generated positive returns, while VC lost money. PE performance, dating back to the beginning of 2022, remains negative, highlighting the difficulty of generating attractive investment returns in a higher interest rate and lower multiple environment. As PE managers devise value creation strategies to improve performance, their focus includes ensuring operating efficiency and profitability of their portfolio companies.

Deal activity volume and count fell sharply, by 21 percent and 24 percent, respectively, which continued the slower pace set in the second half of 2022. Sponsors largely opted to hold assets longer rather than lock in underwhelming returns. While higher financing costs and valuation mismatches weighed on overall deal activity, certain types of M&A gained share. Add-on deals, for example, accounted for a record 46 percent of total buyout deal volume last year.

Real estate recedes

For real estate, 2023 was a year of transition, characterized by a litany of new and familiar challenges. Pandemic-driven demand issues continued, while elevated financing costs, expanding cap rates, and valuation uncertainty weighed on commercial real estate deal volumes, fundraising, and investment performance.

Managers faced one of the toughest fundraising environments in many years. Global closed-end fundraising declined 34 percent to $125 billion. While fundraising challenges were widespread, they were not ubiquitous across strategies. Dollars continued to shift to large, multi-asset class platforms, with the top five managers accounting for 37 percent of aggregate closed-end real estate fundraising. In April, the largest real estate fund ever raised closed on a record $30 billion.

Capital shifted away from core and core-plus strategies as investors sought liquidity through redemptions in open-end vehicles and reduced gross contributions to the lowest level since 2009. Opportunistic strategies benefited from this shift, as investors turned their attention toward capital appreciation over income generation in a market where alternative sources of yield have grown more attractive.

In the United States, for instance, open-end funds, as represented by the National Council of Real Estate Investment Fiduciaries Fund Index—Open-End Equity (NFI-OE), recorded $13 billion in net outflows in 2023, reversing the trend of positive net inflows throughout the 2010s. The negative flows mainly reflected $9 billion in core outflows, with core-plus funds accounting for the remaining outflows, which reversed a 20-year run of net inflows.

As a result, the NAV in US open-end funds fell roughly 16 percent year over year. Meanwhile, global assets under management in closed-end funds reached a new peak of $1.7 trillion as of June 2023, growing 14 percent between June 2022 and June 2023.

Real estate underperformed historical averages in 2023, as previously high-performing multifamily and industrial sectors joined office in producing negative returns caused by slowing demand growth and cap rate expansion. Closed-end funds generated a pooled net IRR of −3.5 percent in the first nine months of 2023, losing money for the first time since the global financial crisis. The lone bright spot among major sectors was hospitality, which—thanks to a rush of postpandemic travel—returned 10.3 percent in 2023. 2 Based on NCREIFs NPI index. Hotels represent 1 percent of total properties in the index. As a whole, the average pooled lifetime net IRRs for closed-end real estate funds from 2011–20 vintages remained around historical levels (9.8 percent).

Global deal volume declined 47 percent in 2023 to reach a ten-year low of $650 billion, driven by widening bid–ask spreads amid valuation uncertainty and higher costs of financing (Exhibit 3). 3 CBRE, Real Capital Analytics Deal flow in the office sector remained depressed, partly as a result of continued uncertainty in the demand for space in a hybrid working world.

During a turbulent year for private markets, private debt was a relative bright spot, topping private markets asset classes in terms of fundraising growth, AUM growth, and performance.

Fundraising for private debt declined just 13 percent year over year, nearly ten percentage points less than the private markets overall. Despite the decline in fundraising, AUM surged 27 percent to $1.7 trillion. And private debt posted the highest investment returns of any private asset class through the first three quarters of 2023.

Private debt’s risk/return characteristics are well suited to the current environment. With interest rates at their highest in more than a decade, current yields in the asset class have grown more attractive on both an absolute and relative basis, particularly if higher rates sustain and put downward pressure on equity returns (Exhibit 4). The built-in security derived from debt’s privileged position in the capital structure, moreover, appeals to investors that are wary of market volatility and valuation uncertainty.

Direct lending continued to be the largest strategy in 2023, with fundraising for the mostly-senior-debt strategy accounting for almost half of the asset class’s total haul (despite declining from the previous year). Separately, mezzanine debt fundraising hit a new high, thanks to the closings of three of the largest funds ever raised in the strategy.

Over the longer term, growth in private debt has largely been driven by institutional investors rotating out of traditional fixed income in favor of private alternatives. Despite this growth in commitments, LPs remain underweight in this asset class relative to their targets. In fact, the allocation gap has only grown wider in recent years, a sharp contrast to other private asset classes, for which LPs’ current allocations exceed their targets on average. According to data from CEM Benchmarking, the private debt allocation gap now stands at 1.4 percent, which means that, in aggregate, investors must commit hundreds of billions in net new capital to the asset class just to reach current targets.

Private debt was not completely immune to the macroeconomic conditions last year, however. Fundraising declined for the second consecutive year and now sits 23 percent below 2021’s peak. Furthermore, though private lenders took share in 2023 from other capital sources, overall deal volumes also declined for the second year in a row. The drop was largely driven by a less active PE deal environment: private debt is predominantly used to finance PE-backed companies, though managers are increasingly diversifying their origination capabilities to include a broad new range of companies and asset types.

Infrastructure and natural resources take a detour

For infrastructure and natural resources fundraising, 2023 was an exceptionally challenging year. Aggregate capital raised declined 53 percent year over year to $82 billion, the lowest annual total since 2013. The size of the drop is particularly surprising in light of infrastructure’s recent momentum. The asset class had set fundraising records in four of the previous five years, and infrastructure is often considered an attractive investment in uncertain markets.

While there is little doubt that the broader fundraising headwinds discussed elsewhere in this report affected infrastructure and natural resources fundraising last year, dynamics specific to the asset class were at play as well. One issue was supply-side timing: nine of the ten largest infrastructure GPs did not close a flagship fund in 2023. Second was the migration of investor dollars away from core and core-plus investments, which have historically accounted for the bulk of infrastructure fundraising, in a higher rate environment.

The asset class had some notable bright spots last year. Fundraising for higher-returning opportunistic strategies more than doubled the prior year’s total (Exhibit 5). AUM grew 18 percent, reaching a new high of $1.5 trillion. Infrastructure funds returned a net IRR of 3.4 percent in 2023; this was below historical averages but still the second-best return among private asset classes. And as was the case in other asset classes, investors concentrated commitments in larger funds and managers in 2023, including in the largest infrastructure fund ever raised.

The outlook for the asset class, moreover, remains positive. Funds targeting a record amount of capital were in the market at year-end, providing a robust foundation for fundraising in 2024 and 2025. A recent spate of infrastructure GP acquisitions signal multi-asset managers’ long-term conviction in the asset class, despite short-term headwinds. Global megatrends like decarbonization and digitization, as well as revolutions in energy and mobility, have spurred new infrastructure investment opportunities around the world, particularly for value-oriented investors that are willing to take on more risk.

Private markets make measured progress in DEI

Diversity, equity, and inclusion (DEI) has become an important part of the fundraising, talent, and investing landscape for private market participants. Encouragingly, incremental progress has been made in recent years, including more diverse talent being brought to entry-level positions, investing roles, and investment committees. The scope of DEI metrics provided to institutional investors during fundraising has also increased in recent years: more than half of PE firms now provide data across investing teams, portfolio company boards, and portfolio company management (versus investment team data only). 4 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023.

In 2023, McKinsey surveyed 66 global private markets firms that collectively employ more than 60,000 people for the second annual State of diversity in global private markets report. 5 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023. The research offers insight into the representation of women and ethnic and racial minorities in private investing as of year-end 2022. In this chapter, we discuss where the numbers stand and how firms can bring a more diverse set of perspectives to the table.

The statistics indicate signs of modest advancement. Overall representation of women in private markets increased two percentage points to 35 percent, and ethnic and racial minorities increased one percentage point to 30 percent (Exhibit 6). Entry-level positions have nearly reached gender parity, with female representation at 48 percent. The share of women holding C-suite roles globally increased 3 percentage points, while the share of people from ethnic and racial minorities in investment committees increased 9 percentage points. There is growing evidence that external hiring is gradually helping close the diversity gap, especially at senior levels. For example, 33 percent of external hires at the managing director level were ethnic or racial minorities, higher than their existing representation level (19 percent).

Yet, the scope of the challenge remains substantial. Women and minorities continue to be underrepresented in senior positions and investing roles. They also experience uneven rates of progress due to lower promotion and higher attrition rates, particularly at smaller firms. Firms are also navigating an increasingly polarized workplace today, with additional scrutiny and a growing number of lawsuits against corporate diversity and inclusion programs, particularly in the US, which threatens to impact the industry’s pace of progress.

Fredrik Dahlqvist is a senior partner in McKinsey’s Stockholm office; Alastair Green  is a senior partner in the Washington, DC, office, where Paul Maia and Alexandra Nee  are partners; David Quigley  is a senior partner in the New York office, where Connor Mangan is an associate partner and Aditya Sanghvi  is a senior partner; Rahel Schneider is an associate partner in the Bay Area office; John Spivey is a partner in the Charlotte office; and Brian Vickery  is a partner in the Boston office.

The authors wish to thank Jonathan Christy, Louis Dufau, Vaibhav Gujral, Graham Healy-Day, Laura Johnson, Ryan Luby, Tripp Norton, Alastair Rami, Henri Torbey, and Alex Wolkomir for their contributions

The authors would also like to thank CEM Benchmarking and the StepStone Group for their partnership in this year's report.

This article was edited by Arshiya Khullar, an editor in the Gurugram office.

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Considering Private Equity? Think Twice Before Investing in Business Development Companies

BDCs offer investors a way into private equity, and they’re hard to recommend.

Since the global financial crisis of 2007-09, the size of the private credit market has grown dramatically and now exceeds $1 trillion . Antti Suhonen, author of the study “ Direct Lending Returns ,” published in the Financial Analysts Journal , examined the returns, risk exposures, and performance persistence of business development companies. BDCs, created by congressional legislation, are closed-end investment vehicles organized under the Investment Company Act of 1940. They have the following characteristics:

• They generally invest in small and midsize companies through debt and, to a lesser extent, equity securities and derivative securities.
• They are required to invest at least 70% of their assets in nonpublic equity and debt of US corporations.
• Eligible investments also include US government securities, cash, and listed securities of companies with a market capitalization of less than $250 million.
• BDC investment holdings are subject to diversification requirements.
• Senior secured loans form the majority of BDC portfolio assets today, though they may also hold subordinated debt as well as equity warrants and direct equity ownership in their portfolio companies.
• BDCs are permitted to use up to 200% leverage. Virtually all BDCs take advantage of a full turn (100%) of leverage. The use of leverage increases risk and drawdowns while also increasing expected returns.
• 90% of a BDC’s income must be derived from dividends and interest, and 90% must be distributed to shareholders.
• Managers are typically compensated through a combination of fixed and incentive-based management fees (percentage of net interest income and realized gains).
• BDCs are not allowed to issue shares to the public below net asset value without annual shareholder approval.

BDCs: Risky and Expensive

Suhonen’s database consisted of 47 BDCs (with about $112 billion of assets at the end of 2021) and covered the period of December 2009 through June 2022. The following chart shows the market-capitalization-weighted asset allocation of the 47 BDCs in the sample.

Market-Cap-Weighted Asset Allocation of 47 BDCs in Study

Following is a summary of Suhonen’s key findings:

• BDC portfolio yield averaged 10.8% over the sample period (or average USD three-month Libor plus 10%). The yield compressed by 4 percentage points, from a high of 12.8% in 2012 to 8.6% in first-quarter 2022, before the widening in the final quarter of the sample. The compression is likely in part a reflection of the improvement in BDC loan seniority (see chart). The average BDC yield spread over leveraged loans during the sample period was 5.7%, ranging between 0.9% and 7.9%.
• Since 2019, the debt/equity ratio has averaged 102% versus 61% in 2009-17. The increase in leverage is due to congressional action taken in 2019 that raised the leverage limit to 2.0 from 1.0.
• The average annual management fee expense (including incentive fees) over the sample period was 3.19% of total assets, corresponding to 5.46% of net assets. This compares with an average management fee of 3.14% per year of net assets for private direct lending funds.
• The average financing expense was 4.36% per year of total debt, or three-month Libor plus 3.58% given an average Libor rate of 0.78% during the period.
• BDC industry total returns at the market-capitalization-weighted index level were 8.63% per year with a Sharpe ratio of 0.38. The Sharpe ratio was well below that of comparable benchmarks such as leveraged loans (0.61) and high-yield bonds (0.63).
• BDC market value returns were best explained by a combination of liquid leveraged loan performance and equity market, size, and value factors.
• Bundling the equity factors into one by using an equity small-cap value index as an explanatory variable alongside leveraged loans, the two regressors explained 81% of BDC market value index variation in monthly data and resulted in a negative but statistically insignificant alpha.
• BDCs’ volatility was broadly in line with that of small-cap equities. However, their returns exhibited more negative skewness and excess kurtosis than the equity benchmarks, though less than the leveraged loan index.
• Individual BDCs exhibited wide performance dispersion, with the difference between top- and bottom-quartile returns in excess of 15% per year across different performance measures.
• Based on an NAV return metric, BDC performance exhibited strong year-on-year persistence, especially in the bottom and top quartiles of past returns.
• There was a statistically significant relationship between valuation (price/NAV) and performance, with BDCs with greater price/NAV premium (or smaller discount) outperforming those with a smaller premium (larger discount) by all return metrics.*

Investor Takeaways

Once traded in the listed market, BDCs adopt the volatility of common stocks and may deviate from their fundamental value because of changes in investor risk aversion and market liquidity. The result is that they are riskier than the assets they hold, a problem compounded by their use of high amounts of leverage. Add to that their extremely high fees relative to net investor assets (in excess of 5%), and it is hard to make a case for investing in public BDCs, especially when there are less risky and less expensive alternatives, such as Cliffwater Corporate Lending Fund CCLFX and Cliffwater Enhanced Lending Fund CELFX . The high expense ratio is particularly egregious when it is applied to gross assets (as opposed to net assets). The reason is that gross assets include those that are financed with leverage that has had an average cost of about 3.6% above Libor. The result is that the investor is paying full fees on the leveraged assets when they are not earning the full yield paid by the borrower. In contrast, Cliffwater’s fees are applied to net assets.

*When I discussed this finding with Cliffwater’s CEO, Stephen Nesbitt, he informed me that, while the finding was correct for a buy-and-hold strategy, his research found that a periodic rebalancing strategy from high price/book to low price/book produced higher returns than a buy-and-hold strategy.

Larry Swedroe is head of financial and economic research for Buckingham Wealth Partners, collectively Buckingham Strategic Wealth, LLC and Buckingham Strategic Partners, LLC.

For educational and informational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Mentions of specific securities are for educational purposes only and are not recommendations of implementing them into a portfolio. Individuals should speak with a qualified financial professional based on their circumstances. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. The opinions expressed here are their own and may not accurately reflect those of Buckingham Strategic Wealth, LLC or Buckingham Strategic Partners, LLC, collectively Buckingham Wealth Partners. LSR-24-627

Larry Swedroe is a freelance writer. The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies .

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Calpers to direct $25bn to green private market investments

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Calpers, the US’s biggest public pension plan, will pour more than $25bn into green-related private market investments, in one of the largest commitments by a major fund to unlisted climate assets.

The giant US pension group is examining the private equity, real estate and infrastructure markets, particularly in Asia and Europe, as it looks to deploy the capital over the next six years, a senior executive told the Financial Times.

“Those are the ones [private market assets] that have very evident climate investment opportunities,” said Peter Cashion, Calpers’ managing investment director, sustainable investments.

The comments are the first time Calpers has publicly revealed how it plans to spend an extra $53bn it committed last November to an expanded low carbon assets portfolio. The new goal would take the total portfolio to $100bn by 2030, or more than double the initial $47bn in funds.

“We’re expecting [private markets will] represent more than half of the $53bn,” he added. “It’s pretty significant.”

The allocation will propel the $483bn fund to become one of the world’s largest investors in so-called climate solutions, in spite of the political pushback against environmental, social and governance-based investing in the US.

“The reason we have conviction around it, we’re really doing this [is] to generate alpha and outperformance, because we see the investment opportunity set from this really fundamental change in the economy,” said Cashion. “At the same time, it’ll have a side benefit of having a portfolio that has a lower carbon intensity.”

California is distinct for having set out a framework aimed at using the state’s big public pension plans, including Calpers, to drive investments in sustainable technologies and other green assets.

Calpers’ green investment push comes as the issue of how to pay for a shift to a cleaner economy  dominates global discussions  about climate change.

Almost 200 countries agreed to transition away from fossil fuels at the UN COP28 climate summit in Dubai in December, leaving governments with already-stretched budgets scrambling to drive investments to green solutions. 

A report last year from the Climate Policy Initiative found that climate finance globally will need to increase to about $9tn a year by 2030, up from $1.3tn in 2021-2022, in order to meet the Paris accord, where countries agreed to limit the long-term global temperature rise. Investments from pension funds and the private sector are expected to play a crucial role. 

In real estate, Cashion said he saw opportunities in so-called green buildings. “The measurement for what qualifies in your real estate portfolio as green is becoming easier,” he said.

Calpers would build out its investments in renewable infrastructure, he said, as well as looking at private equity investments in companies that support the shift to clean energy, citing those servicing wind turbines or developing software to make solar panels more efficient as examples.

“[Renewables are] already an area where we’re very active and we’ll continue to do that and build out that portfolio,” he said.

In terms of where the climate money would be deployed, Cashion said his “expectation is that Asia and Europe will present significant opportunities”, with a particular focus on emerging markets.

Cashion, who was in Europe to meet other pension funds, said that with the rise in global greenhouse gas emissions now coming from non-western nations, “the opportunity set in emerging markets will be huge”. 

But he added that the emerging market countries where Calpers could operate at scale was a “pretty small number” and would be driven by where the asset managers it uses saw the best opportunities.

The Biden administration has tried to make the US more attractive for climate investors with tax incentives, through the Inflation Reduction Act. But Cashion said its investment criteria were global.

“The IRA has been has been excellent and has increased (investment) opportunities for us,” he said. “But we’ll be driven by where we see the opportunities.”

As well as working with its existing asset managers, Calpers would look to work with “specialised, smaller managers who may well have access to deals that the bigger players do not”.

Further details of the climate plan come two months after Calpers approved plans to increase its overall allocation to private markets from 33 per cent of plan assets to 40 per cent.

A spokesperson for Calpers said this increased allocation, approved by the Calpers Board of Administration in March, would not be measured on the same timeline as the $100bn climate plan, which is linked to 2030. No further details on investments from the wider private markets drive were disclosed.

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International Edition

Blackstone's big gamble

Has the world's largest private-equity firm built a $114 billion house of cards?

In 2017, Blackstone — the world's largest private-equity firm , which usually caters to big institutions and the very wealthy — decided to give ordinary investors an opportunity to get in on the firm's magic. It created BREIT, a private fund that buys commercial real estate like warehouses and apartment buildings, and marketed it to everyday investors as an "all-weather strategy to build long-term wealth across market cycles."

And it was magic: By offering an annual dividend of about 4% in a world where interest rates were close to zero, BREIT quickly became a giant . At its peak in 2021, the fund was attracting as much as $3 billion a month in new investments. Today, BREIT boasts assets of $114 billion — about 8% of Blackstone's entire fee-earning assets — and has generated over $5 billion in management and performance fees.

But over the past two years, some investors have grown suspicious that BREIT isn't the rock-solid investment Blackstone claims it is. Since its inception, the fund says it has delivered an annualized net return of 10.5% — almost double an index of publicly traded REITs. Even as commercial real estate has been battered in the wake of the pandemic, BREIT has somehow managed to defy gravity, outperforming comparable funds by seemingly fantastic margins. In the fall of 2022, after the Fed's interest-rate increases began to shake the commercial real-estate market, investors began asking for their money back — more than $15 billion to date. Faced with a run on the fund, Blackstone cited a provision that allowed it to take its time refunding antsy investors — a decision that only served to further alarm the market. Shares in Blackstone tumbled by nearly 20% . Last year, BREIT failed to generate enough cash to cover its annual dividend.

In recent months, the fund has appeared to recover from the debacle. BREIT announced it was able to fulfill 100% of the repurchase requests it received in February, which had slowed to just under $1 billion. Amid the promise of a rebound, Blackstone's stock has regained almost 50% from its lows. "I believe we'll look back at 2023 as the cyclical bottom for our firm," Steve Schwarzman, Blackstone's CEO , told analysts at an earnings call in January.

But the rosy picture that Blackstone paints may not tell the whole story. In recent months I've spoken with veteran analysts, accountants, and investors who have come to believe that BREIT is essentially a house of cards. That's because the returns the fund claims it has delivered depend almost entirely on BREIT's own estimates, which skeptics believe are wildly inflated. What's more, when BREIT faced a flood of redemption requests from investors, it only fulfilled all those requests after raising cash from new investors — including one that received a sweetheart deal from Blackstone to invest in BREIT. "It is the absolute definition of a Ponzi scheme," said Nate Koppikar, who runs a hedge fund called Orso Partners that has shorted Blackstone's stock because of concerns over BREIT. Unless the real-estate market comes roaring back, analysts warn, BREIT could end up shrinking to a fraction of its current size, leaving the fund's investors holding the bag.

"Surveying some of the ways that Blackstone has misled investors over the past five months, we are more convinced than ever that BREIT is a bad investment created for the benefit of Blackstone," Craig McCann, a financial analyst who served as an economist at the Securities Exchange Commission, wrote last year. "Investors should not accept anything Blackstone and BREIT state as truthful."

It's impossible to know exactly how valuable BREIT is. Because the fund is not publicly traded, the market doesn't set its price per share — Blackstone does. You buy shares in BREIT based on your faith in Blackstone's investing brilliance and in the firm's account of its own performance. Investing in a private real-estate trust like BREIT is, ultimately, an exercise in trust.

BREIT's returns are based on a measure called net asset value, or NAV. That's supposed to be the value of all the assets the fund owns, minus its debt. Blackstone told Business Insider that it has an "incredibly rigorous valuation process" — one it says has led it to adjust its NAV more aggressively than other REITS. But BREIT doesn't let investors or regulators see some of the crucial assumptions that go into calculating its NAV. As BREIT's financial documents state, Blackstone "is ultimately and solely responsible for the determination of our NAV." The methods used to calculate it are "not prescribed by rules of the SEC or any other regulatory agency," and the NAV "is not audited by our independent registered public accounting firm."

Chilton Capital Management, which invests in publicly traded REITs , analyzed the way Blackstone adjusts the value of BREIT to reflect changes in the underlying real estate it owns. Rather than being "marked to market" every day — or every millisecond, like public REITS — Blackstone adjusts its NAV on a monthly basis. In today's volatile real-estate market , that means its stated value can lag way behind reality. "It inherently is a flawed process when prices are changing quickly," Chilton observes. "We refer to this imperfect appraisal process as 'mark to magic.'" In 2022, after the crash in commercial real estate , publicly traded REITs that own assets similar to BREIT's — multifamily housing and industrial buildings — have been selling at sharp discounts. But BREIT, by "marking to magic," has continued to claim far higher returns. Using a collection of market-based metrics, Chilton concluded last April that BREIT was overstating the value of its NAV by more than 55%.

​​McCann, who is now a principal at SLCG Economics Consulting, reached a similar conclusion. He calculated that the cumulative returns of other funds in the sectors in which BREIT is concentrated plunged by over 30% in 2022. Yet BREIT claimed that its value increased during the same period. In the dry language of market analysts, McCann called the fund's claims about its NAV "unreliable."

Blackstone considers such comparisons unfair. It insists that BREIT shouldn't be compared to publicly traded funds, which it argues are more volatile than private offerings. In a statement to BI, the firm insists that BREIT is able to outperform other funds for a simple reason: because it owns better assets than they do. BREIT's portfolio, Blackstone says, is "concentrated in the best performing sectors (data centers, logistics and student housing) and geographies (virtually no urban exposure)." Only 3% of BREIT's holdings are in office buildings, which have been ground zero for commercial real estate pain. The company points to its performance during the global financial crisis of 2008 as evidence of its ability to outperform its competitors during "periods of dislocation" and notes that it has sold $20 billion of real estate since the beginning of 2022, when interest rates began to rise, generating a profit of $4 billion.

"Not all real estate is created equal," BREIT boasted in a recent letter to stockholders, "and where you invest matters."

But Blackstone's principal claim — that sounder investments have led to higher returns — is difficult to square with the ongoing decline of commercial real estate. It's hard to fathom how BREIT could have bought so many properties at the height of the market and yet somehow been selective enough to have dodged all the post-pandemic downturns suffered by other funds. According to BREIT's own numbers, data centers and student housing make up only a small part of its portfolio. And many of the data centers Blackstone says have already created so much value for the fund aren't even up and running yet — they're still in development.

Publicly traded REITs, meanwhile, aren't the only ones marking down their assets. Bluerock Total Income + Real Estate, which has over $300 billion invested in a host of institutional real estate funds, has marked its NAV back to pre-pandemic levels — down more than 20% from its peak. Other major investors, unlike Blackstone, apparently don't see their real estate holdings as immune from the chaos buffeting the rest of the market.

Blackstone also argues in its marketing material that BREIT is better positioned than other real-estate funds because its balance sheet is "substantially hedged, " meaning it has fixed-rate debt and derivatives in place that protect against rising interest rates. That's true — for the moment. But BREIT's future cash flows are, in fact, very sensitive to interest rates. At the end of last year, BREIT had $62 billion of debt secured by its properties, and it paid an effective interest rate of 4.3% that it locked in before rates spiked. But $47 billion of that debt will come due over the next four years — and if rates stay elevated, BREIT could face over $1 billion in added interest costs. That, BREIT has warned investors, "could reduce our cash flows and our ability to make distributions to you." Investing in BREIT is essentially a bet that interest rates are going to fall — because if they don't, it could be ruinous.

You might argue that it ultimately doesn't matter if BREIT is overvaluing its NAV. As long as investors keep getting their hefty annual dividends, who cares? That's basically the same argument that Donald Trump made in defending himself against charges of systematically overstating his assets — that everybody made money, so no one was defrauded. But miscalculating the value of a vehicle like BREIT inflates the fees investors pay for participating in the fund while simultaneously depriving them of the opportunity to accurately assess the risk they're taking. In addition, Blackstone is incentivized to overvalue its NAV, because that's the number it uses to calculate the management and performance fees that investors pay. "It's a text-book example of conflict of interests," Robert Chang, the head of securities litigation at Fideres, a consulting firm that specializes in investigating corporate wrongdoing, wrote in a piece about BREIT. Fideres calculates that since early 2022, the fund's NAV per share has remained relatively stable — while public REITs have lost more than 30% of their value. If BREIT's assets are indeed overvalued, Fideres estimates, investors may have overpaid management and performance fees to the tune of hundreds of millions of dollars a year.

The alarm bells over BREIT go beyond whether Blackstone is overstating the fund's value. BREIT has said that through June of last year, 100% of its dividends were funded by cash flows from operations — the money produced by its real-estate assets. But that claim is more than a little misleading. In the measure of cash that BREIT highlights, it doesn't subtract the expenditures required to maintain its properties, which is standard for the industry. In its own fine print, in fact, BREIT does provide several other measures that are more analogous to how most REITS define cash flow; by those measures, the fund has never been able to cover its dividend from its cash flow.

No one I spoke with believes that Blackstone set out to build a house of cards. Rather, they say, BREIT was a victim of its own success.

In its response to BI, Blackstone argues that because its management fees are not paid in cash, they are "properly excluded" from some of its measures. But not being able to pay the dividend you've promised can be seen as a Ponzi-ish warning, because it means the money has to come from selling off assets, borrowing money, or attracting new investors — a reality that BREIT acknowledges on the third page of its financial documents (and one that the SEC has noted as a risk factor for all private REITS). And if you subtract Blackstone's fees, BREIT has covered less than 50% of its dividend distribution since its inception. Indeed, one of the primary reasons BREIT has been able to pay its dividends is because roughly half of all shareholders have elected to receive their dividends not in cash, but in more shares of BREIT. In other words, the game depends on the continued belief of investors — on their willingness to accept shares of BREIT in lieu of cash.

Getting paid in shares, of course, is not the same as getting paid in cash. The more shares BREIT issues to pay the dividend — and its fees to Blackstone — the less each share is worth. "On the surface, it all looks so safe," McCann tells BI. "You're getting 4% or so a year, and you think it looks like a bond, and you think the underlying investments are doing well. Only when you dig in do you figure out that even if you're taking cash, the money is a return of capital, not a return on capital."

In 2022, when investors started asking for their money back in droves, BREIT faced a big problem. If its assets weren't marked correctly, it couldn't sell them off to pay investors without fessing up. Then the fund got what looked like a vote of confidence. In January 2023, BREIT announced that the University of California had decided to invest $4 billion in the fund , giving it a much-needed infusion of cash. Schwarzman called the investment a "validation" of BREIT's strategy.

But it wasn't. To entice the university to invest, Blackstone had offered it a special deal. BREIT agreed to award the university an additional $1 billion in stock in the event that the fund's rate of return fell below 11.25%. The deal was so sweet that UC's Board of Regents quickly agreed to invest another $500 million on the same terms.

"Contrary to Blackstone's spin," wrote McCann, "the University of California investment strongly supports the view that BREIT is a terrible investment."

Scoring the new investment helped BREIT pay off all those who wanted to exit the fund, albeit slowly. And for the moment, the stampede appears to have subsided.

Blackstone says that BREIT has "access to ample liquidity across multiple sources," including "$119.1 billion of high-quality real estate that can be sold at market prices if we choose to do so." But if investors stage another rush for the doors, BREIT could face a serious reckoning, especially given its high level of debt. If it has overvalued its properties, as some experts suggest, then it will have to sell its assets at a price below where they are marked. And the more shareholders it has to redeem, the faster its equity will become worthless. Those who get their money out early will be OK. Those who are last in line, not so much.

"If BREIT has to sell properties to meet redemptions, and they have to dip deeper into their portfolio to sell less desirable properties, they'll have to mark their NAV to reflect the actual sales prices," says Phil Bak, the founder and CEO of Armada Investors, a quantitative asset manager that specializes in REITs. "That could scare the people who have been clinging to fund performance as a reason not to redeem, which in turn causes a death spiral."

No one I spoke with believes that Blackstone set out to build a house of cards. Rather, they say, BREIT was a victim of its own success. Money poured in at the height of the market, meaning that BREIT invested at a moment when commercial real estate was priced to perfection. Real estate, by its nature, is always somewhat illiquid — you can't sell your share of an apartment building on the stock market. And in a bad market, it's very illiquid, especially if what you own is marked at a price where no one will buy it. But while Blackstone says it designed BREIT so investors could get their money out, it seems not to have foreseen that scores of individual investors — unlike the big institutions that have typically been its clients, who are forced to commit their funds for long periods of time — might get spooked enough to ask for their money back all at the same time. Titans of Wall Street often believe that their brilliance should insulate them from skepticism. Their supreme confidence in their own wisdom is perhaps their most marketable asset.

It's completely possible, of course, that BREIT will survive, no matter how flawed its model might be. If the real-estate market reignites, that will boost the value of the assets in funds like BREIT. And if enough new investors are willing to place bets on BREIT — if trust in Blackstone's "magic" remains high — then everyone will keep making money, if only on paper, even if BREIT is overvaluing its assets. Blackstone's success has already created at least three billionaires, chief among them its CEO, Steve Schwarzman , who is worth almost $40 billion. The ability to enrich yourself seems to be a key part of what inspires others to follow your investment advice.

But there are plenty of warning signs that things could get worse. It's unlikely that the market will pick up fast enough to offset BREIT's woes. "Commercial real estate is a slow burn," Brian Moynihan, the CEO of Bank of America, recently observed . In its financial statements, Blackstone says it continues to count on "high single-digit growth" in its two biggest sectors, rental housing and industrial properties. But BREIT's overall growth was just 6% last year, and it has been decelerating quarter over quarter. If the market continues to fall, it will be harder for BREIT to claim it's the shining exception .

To make matters worse, the way BREIT is structured could prove to be a ticking time bomb. Like other private vehicles, BREIT pays hefty commissions to financial advisors who steer their clients to the fund. All told, Blackstone has paid Wall Street banks and brokers more than $700 million in brokerage fees. But for brokers who put their clients in BREIT early on, those commissions could soon hit a mandated cap of 8.75% — meaning they'll no longer be incentivized to sell the fund. If they start advising their clients to exit BREIT, it could spur an even bigger rush for the doors.

The future of BREIT could also send shock waves through Blackstone's bottom line. In 2022 alone, SLCG calculated, fees from BREIT generated 13.3% of Blackstone's total management fees and 12.6% of its performance revenue. If BREIT and its sister fund, BPP, are forced to slash their NAVs by 50%, the ensuing reduction in fees would wipe out over 15% of Blackstone's fee-related earnings — earnings that Wall Street, in contrast, is expecting will grow by 15%. According to Blackstone's financial statements, it's already anticipating it will have to pay the University of California $564 million in BREIT stock — an expense it doesn't count in the numbers it highlights to Wall Street. If BREIT craters, it will also be difficult for Blackstone to live up to Wall Street's expectations for its long-term earnings growth, which depend in part on its successful expansion into the retail market.

There are bigger issues at stake than Blackstone's bottom line. It's worth remembering, as Chilton notes, that private funds like BREIT were among "the biggest losers" during the global financial crisis of 2008. But that lesson seems lost on today's investors, who have once again flocked to private real-estate funds in a time of extreme market volatility. In the two years after the pandemic hit, private funds like BREIT raised $67 billion — far more than they drummed up in the two years leading up to the Great Recession. "While the tombstones may have different names on them," Chilton observes, "the reasons for the demise of private equity real estate players are going to rhyme, and possibly mirror those from the global financial crisis."

That's why the story of BREIT involves more than profits and losses. It's only recently that private-equity firms like Blackstone have started offering products to ordinary investors. "BREIT was a test case for the whole industry," says Koppikar, of Orso Partners. Perhaps, given the questions swirling around BREIT, it's time to rethink whether the world's wealthiest funds should be trusted to take billions of dollars in fees from ordinary investors without more oversight. As it stands, it's impossible to know what BREIT's assets are actually worth — and therein lies the problem. In the absence of a market price, independent accounting and tighter government regulation are needed to ensure that investors have the accurate, verifiable numbers they need to make informed decisions. With private funds like BREIT, too much maneuvering takes place in the dark. And if history is any lesson, the dark is a very bad place to be doing business.

Bethany McLean is a special correspondent at Business Insider.

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