So, this is something I haven't seen discussed on the site before in detail, only tangentially. Has anyone on here gone through the process of (or is knowledgeable about) starting your own real estate investment fund in detail? Obviously, things like strategy, fundraising, partnership structure, etc have to be planned, but I'm curious if anyone has actually done this and if so, if you have any insight from your experience as to what the biggest challenges were, the most tedious things you had to do, pitfalls, etc.
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this should help: https://www.wallstreetoasis.com/forums/from-real-estate-finance-to-foun…
What are your specific questions on the legal side of things? The business will funded through the fees you generate off the fund entity. Given that this will be your first fund it's probably going to be a Reg D 506 unregistered offering. That will likely cost you $25k - $50k depending on who you select as your counsel. Assuming you select a law firm with decent experience in this space it will probably take 3 - 6 months to document everything and prepare the PPM. You can 100% do it for cheaper, but it will take longer and you might not have all the bells and whistles someone like K&E would provide.
While the documents are being drafted you should be out marketing your fund. I would say it's typical to schedule a first closing once you have raised about 20% - 25% of your fund. You can certainly hold a first closing with less though. Fund raising is a total grind. However long you think it should take, double it.
A lot of these details depend on exactly what you are looking to do. I have some experience in this space if you have more specific questions.
I have a lot of experience working on fund formation in a top group at a global law firm. PM me with any questions, but here are some general notes that are not to be construed as legal advice and are solely my opinion as an individual:
First step is going to be structuring your fund. This is going to involve a law practice with a deep bench in terms of tax law. Basically you're going to be spending a decent amount of time establishing where your LPs are coming from, what sorts of feeder vehicles and blockers will need to be put in place to ensure the correct taxation treatment for each LP.
Since it is your first fund, you will also be figuring out the "upper tier" - i.e. the structure and operating agreements of the management company that will provide investment advisory services to each fund you launch regardless of vintage.
Side note: I think the 25-50k price tag quoted by picklemonkey is a severe underestimation of what your legal setup costs will be by at least an order of magnitude (especially at a place like K&E), but never say never, right?
Once upper tier and Fund I structure is in place, you'll set about putting together the offering memoranda and subscription agreement forms. This will take some time, maybe a month or two depending?
Once the structure, the offering docs, and the subscription form-of agreements are in place, you'll begin the process of fundraising. I'm not sure what kind of LP interest you have now or what type of money you're going after, but this is usually the difficult part of the process. This is where you're going to go back and forth with LPs negotiating the terms of their subscription, giving them comfort, entering into letter agreements to carve out various things not discussed in the LPA, etc.
If this is your first vintage and you aren't the scion of some mega manager, I expect this part to be your biggest stumbling block. The easiest money to get is HNW/family friends, followed by private foundations, and then large corporate/state pension plan money - this gradation is purely based on size. Small LPs will be less knowledgeable about what is market and may therefore be less picky about the terms of their subscription, however they are smaller and will therefore require more effort to get the requisite number for hitting your funding target. Small LPs can also slow things down because they subscribe to fewer funds, meaning things run less clockwork on their end than they do with larger institutional investors.
For many, the ideal situation to be in is to have one or two big investors with a few hundred million in apiece, as the operational and transactional costs of the fund increase with each LP. If that's not possible for you, then you should try to get some small investors, and at some point hopefully they will snowball into a large enough quantity that other larger LPs will take interest. In my experience, some small guys need to get in before the big guys follow suit.
PM me if you have any specific questions.
There's obviously lots of stuff to figure out on this, but having done with this a number of clients, and explored it with a number of others, I would hone your focus on what truly matters to succeeding at this. It's 3 things:
Capital: I love the posts that talk about starting small and building your capital. But, no matter what size you start with, your question is, can you get the amount of capital you want on the terms you want? Obviously, an investment fund is an incredibly simple business model, and this is the juice. I suggest you don't just want the capital, but you want to have a highly methodical approach to consistently raising it. (what I call a capital machine)
Lead Generation: Cut through all the noise, and every private equity and real estate investing business comes down to these two things: Can you get the capital? Can you source and execute on attractive deals? Most people figure that deals will show up, etc. I suggest, again, you want to step back now and develop a badass approach to how you go to market and drive lead generation. (this I call a lead gen machine...)
Is team: Honestly, if you get the first two right, the team will show up. But, if you're looking to drive a real capital raise, you must be able to demonstrate that you've got the team in place to drive the business. You may not need to have them hired and ready to go. But you certainly must be able to recruit the right team to succeed.
This is what we imagine when you kids ask "should I start my own fund?" (Originally Posted: 03/22/2015)
From the WSJ (link inside the post) "Would-Be Financial Whiz Is Charged With Stealing From Investors"
The emails to clients are gold.
"you idiot f*ck" / "I'm a human being" / "you know that I love you"
To anyone out there wanting to start your own fund, this is a great manual of what NOT to do.
Enjoy. '
http://www.wsj.com/articles/would-be-financial-whiz-is-charged-with-ste…
That made me laugh... Speaking of... I'm looking for people to invest in my own Fund. It's called Frieds Capital Management. I am the only Alternative Asset Manager who invests in a very specific subset of the investment world. I am particularly focused on bowling, booze, weed, nihilsts and rug, especially rugs that tie the room together, related investments. Would you be interested in getting into this opportunity at the ground level?
Hrm... where have I heard that pitch before?
No - his investors don't deserve to lose their money.
Bloomberg and BarclayHedge are the ones to blame. They did no diligence what so ever, and investors thought they were using trusted sources. Given their position in the market they should not get away with this. Madoff and co. coned a lot of hard working people because too many fuck heads in positions of power (fund of funds etc...) did not do a proper due diligence.
You can say whatever you want about "oh, but I would have checked"; we all make mistakes. Sometimes costly, and sadly that retired guy who might not be all there lost part of his pension. Not great.