How to build a Private Equity firm?

Building a private equity firm involves deep strategic planning and understanding of both financial and operational structures. Let’s go through each aspect of creating a private equity firm in more detail, including typical roles, responsibilities, and the types of funds available.

Big disclaimer ... get some help if you build a PE firm - it's a complicated process and relies on legal and financial acumen. :)

Let's kick things off by asking the question: Where to Play?

When deciding where to focus, a key consideration is the type of private equity fund you want to establish.

Let's have a look at the existing market to get some inspiration ...

Private equity funds are typically classified by the size of the companies they invest in: small-cap, mid-cap, and large-cap funds. Small-cap funds focus on smaller businesses, often family-owned, with valuations under $500 million. These companies can offer high growth potential but also higher risk. Mid-cap funds invest in companies valued between $500 million and $5 billion. These companies typically have established operations but may need help scaling or optimizing their business models. Large-cap funds focus on very large, established companies, often with global operations, and these companies tend to be more stable but offer lower growth potential compared to smaller firms. Starting with mid-cap funds can offer a balanced approach—there’s a strong potential for growth without the high risk associated with small-cap companies, and the operational complexities are more manageable than those of large-cap companies.

You also need to decide whether to specialize in a specific industry or to spread your investments across different sectors. Specialization allows you to develop deep expertise and relationships within a niche (e.g., healthcare, technology, or industrial goods), which can give you an edge in sourcing deals and adding value post-investment. A diversified approach, by contrast, spreads your risk across industries but might make it harder to develop deep knowledge in any one area.

Ok - we know where to play - now ... who do we need in our team?

In the private equity world, roles are clearly defined, and building the right team is crucial to your firm’s success. The most common roles in a private equity firm include:

General Partners (GPs)

The GPs are the key decision-makers and executives who manage the fund and make the final calls on investments. They are responsible for sourcing deals, conducting due diligence, and negotiating acquisitions. GPs are also responsible for maintaining relationships with the firm’s investors and ensuring the overall success of the fund. In smaller firms, GPs will often be very hands-on with portfolio companies.

Investment Directors/Principals

These individuals typically manage the deal pipeline and are responsible for executing transactions. They conduct due diligence, negotiate terms, and oversee the performance of the portfolio companies. Principals often act as the bridge between GPs and lower-level associates and analysts, guiding the investment process from sourcing deals to overseeing operations.

Vice Presidents (VPs)

VPs are involved in deal execution, often taking on a leadership role in conducting due diligence, evaluating financial models, and managing day-to-day relationships with portfolio companies. They also support the GPs and Principals in strategy discussions.

Associates and Analysts

Associates and analysts do the groundwork—building financial models, conducting market research, and performing initial due diligence. They are typically tasked with assessing potential investments, looking at a company’s financials, and evaluating its growth potential. Analysts are generally more junior, and associates usually have a few years of experience in investment banking or consulting.

Operating Partners

These are seasoned executives, often with industry expertise, who work closely with portfolio companies to implement operational improvements. Their job is to help companies improve profitability, manage restructuring, or grow strategically. Operating partners may work full-time within the firm or be brought in on a part-time basis for specific projects.

Each of these roles has distinct responsibilities, but the success of your PE firm depends on how well the team works together to source deals, manage investments, and deliver returns to investors. A PE firm without returns isn't that attractive, right? So let's have a look at how a PE firm operates.

First - let's look at how we can secure our "fuel" ... Capital

Raising capital for a private equity firm involves convincing investors (known as Limited Partners, or LPs) to commit funds. LPs can include institutional investors like pension funds, insurance companies, university endowments, or wealthy individuals. The size of the investors you target will often depend on the size of the fund you're trying to raise. Large-cap funds, for example, will need to court large institutional investors, while smaller funds may focus on high-net-worth individuals or family offices.

The fundraising process usually starts with crafting a compelling investment thesis. This is the story you tell investors about why your fund will succeed—what types of companies you will invest in, how you will improve those companies, and what kind of returns they can expect. GPs typically spend months (or longer) building relationships with potential LPs, convincing them of the value of their investment strategy.

Once the money is raised, your investor relations can't stop. You’ll need to provide regular updates to your LPs, sharing financial reports, company performance metrics, and general market outlooks. Most PE firms invest in a good IT and system infrastructure to facilitate that process. Maintaining strong, transparent relationships with LPs is crucial to ensuring that they invest in future funds.

How can I find the right investments as PE firm?

Deal sourcing is one of the most competitive parts of running a private equity firm. Here, strategy is key. You need to decide whether to focus on proprietary deals, where you approach companies directly or through your network, or auction processes, where many firms bid for the same company. Proprietary deals are often preferable because they can offer better terms and less competition, but they require more effort to find. Auctions, on the other hand, are faster and give you access to more companies, but the competition can drive up prices.

There’s also the question of deal size. Some firms focus on buying small companies that are struggling but have potential. These companies often require operational improvements or new leadership to succeed. Other firms prefer to buy larger, more established companies that are already performing well and just need some strategic guidance. Your choice will depend on your risk tolerance and the expertise of your team.

Ok - we have bought a company - congrats! Now what ...

Buying a company is just the beginning—what happens next determines whether your investment will succeed. Private equity firms typically focus on value creation, which involves improving the company’s operations, increasing revenue, and preparing it for a successful exit. This might include making operational improvements, helping the company enter new markets, or working with the management team to enhance their leadership and strategy.

Firms often bring in operating partners or outside consultants to work with portfolio companies. These experts may help improve supply chains, cut unnecessary costs, or implement new technology to make the business more efficient. In larger funds, operating partners can focus on major overhauls, while in smaller funds, GPs might take a more hands-on approach with portfolio companies.

Time to realize returns for our LPs ...

The end goal of any private equity investment is to sell the company for a profit, known as an exit. There are a few main types of exits: selling the company to another private equity firm, selling to a strategic buyer (like a large corporation), or taking the company public through an IPO. The best exit strategy depends on market conditions, the company’s growth trajectory, and the goals of your investors.

Deciding when to exit is just as important as how. Exiting too early may mean you miss out on further growth, while holding on too long can expose the company to market risks or operational challenges. Private equity firms usually plan for exits from the moment they acquire a company, setting targets and timelines to maximize the return on investment.

Some challenges you need to deal with are compliance and risk management

Private equity firms operate in a complex regulatory environment, with strict rules governing how they invest and manage money. This means having a solid compliance team is essential to avoid legal and financial risks. Compliance involves everything from ensuring the firm’s investments follow local laws to making sure the firm’s financial reporting is accurate and transparent.

Smaller firms might choose to outsource compliance, while larger firms often have in-house teams to manage these responsibilities. Either way, having a strong compliance framework is critical to maintaining investor trust and avoiding costly penalties.

Choosing a Starting Point: Small, Mid, or Large-Cap Funds?

For a new private equity firm, starting with a mid-cap fund is often the best balance of risk and reward. These funds focus on companies that are large enough to be stable but small enough to offer significant growth potential. Large-cap funds, while appealing due to their stability, require massive amounts of capital and often involve more complex global operations. Small-cap funds can be riskier because the companies involved may lack the resources to handle market fluctuations. Mid-cap companies are often the sweet spot—they offer plenty of opportunities for growth while still being manageable in terms of operational complexity.

By carefully planning each of these steps and understanding the roles and strategies involved, you can create a successful private equity firm capable of delivering strong returns to investors. It’s not just about raising money and buying companies—it’s about making smart decisions at every stage, from market positioning to managing portfolios and planning exits.

Building a new PE firm or improving your existing digital PE capabilities?

We have experience with it. Reach out to Scipio & Partners at [email protected] (www.scipio.expert).

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