How to start a private equity company (2025 guide)

What is a private equity company?

A private equity company is an investment firm that raises capital from institutional investors (limited partners) to acquire, improve, and sell companies for profit. Unlike public companies, PE firms are privately held and typically manage funds with 3-7 year investment horizons, focusing on operational improvements and strategic growth to generate returns for their investors.

Why start a private equity company?

Starting a PE firm offers several advantages for experienced investors and operators:

High earning potential: Management fees (2% of AUM) plus carried interest (20% of profits)
Operational control: Direct involvement in portfolio company management and strategy
Long-term relationships: Deep partnerships with management teams and investors
Market opportunity: $4.4 trillion in global PE assets under management
Flexibility: Choose your investment focus, geography, and deal size

Key requirements to start a PE firm

Before launching your private equity company, ensure you meet these essential requirements:

Category	Details
Capital and track record	Minimum fund size: $50M+ for first-time funds ($100M+ preferred); Proven track record: 3–5 years of relevant investment or operational experience; Skin in the game: 1–2% GP commitment; Institutional relationships: access to pension funds, endowments, family offices
Team and expertise	Investment professionals: 2–3 experienced dealmakers with complementary skills; Operational expertise: industry specialists or former executives; Support functions: CFO, compliance, investor relations; Advisory network: industry experts, former CEOs, board members
Legal and regulatory setup	Entity structure: LP with GP and management company; SEC registration: required if managing $150M+ AUM; State compliance: business registration and tax; Fund documentation: LPA, subscription agreements, side letters

Step-by-step guide to starting a PE company

Follow this comprehensive roadmap to launch your private equity firm successfully.

1. Define your investment strategy

Choose your focus area:

Sector specialization: Technology, healthcare, manufacturing, consumer
Geographic focus: North America, Europe, Asia, or specific regions
Deal size: Lower middle market ($10M-$100M), middle market ($100M-$1B)
Investment stage: Growth equity, buyouts, distressed, special situations

Create your investment thesis:

Market opportunity and trends
Competitive advantages and differentiation
Value creation playbook
Target returns and risk profile

2. Build your founding team

Core team requirements:

Managing Partner: Industry experience, investor relationships, leadership
Investment Partner: Deal sourcing, due diligence, execution
Operating Partner: Portfolio company management, value creation
CFO/COO: Fund administration, compliance, operations

Compensation structure:

Base salaries: $200K-$500K+ depending on experience
Carried interest: 15-25% split among partners
Management fees: Cover operating expenses and salaries

3. Establish legal structure and compliance

Entity formation:

Form GP entity (LLC or corporation)
Create fund LP structure
Establish management company
Set up portfolio company holding structure

Regulatory compliance:

SEC registration (if required)
State business licenses
Tax elections and structuring
Insurance coverage (E&O, D&O)

4. Develop fund documentation

Essential documents:

Limited Partnership Agreement (LPA): Fund terms, economics, governance
Private Placement Memorandum (PPM): Investment strategy, team, track record
Subscription agreements: Investor commitments and representations
Side letters: Custom terms for key investors

5. Raise your first fund

Fundraising process:

Target investors: Pension funds, endowments, family offices, sovereign wealth funds
Fund size: Start with $50M-$200M for first-time funds
Fund terms: 2% management fee, 20% carried interest, 8% preferred return
Timeline: 12-18 months from launch to first close

Investor materials:

Pitch deck and PPM
Track record documentation
Financial projections and models
References and case studies

6. Set up operations and infrastructure

Technology stack:

CRM system: Track investor relationships and deal pipeline
Data room software: Secure document sharing for due diligence
Accounting system: Fund administration and portfolio tracking
Analytics platform: Performance monitoring and reporting

Office and resources:

Physical office or virtual setup
Legal and accounting support
Industry databases and research tools
Professional networks and memberships

7. Launch deal sourcing and execution

Deal sourcing strategies:

Industry networks: Leverage your professional relationships
Investment bankers: Build relationships with sell-side advisors
Portfolio company referrals: Network through existing investments
Direct outreach: Target companies in your focus sectors

Due diligence process:

Financial analysis: Historical performance, projections, valuation
Commercial due diligence: Market analysis, competitive positioning
Legal review: Contracts, compliance, litigation, IP
Operational assessment: Management team, systems, processes

Using data rooms for PE fundraising and operations

A virtual data room (VDR) is essential for private equity firms throughout the investment lifecycle.

PE data room setup

Fundraising applications

Investor due diligence:

Share fund documentation securely with potential LPs
Track which investors are most engaged with your materials
Control access to sensitive information with permissions
Maintain audit trails for compliance

LP reporting:

Quarterly and annual fund performance reports
Portfolio company updates and board materials
Capital call and distribution notices
ESG and impact reporting

Branded LP reporting portal

Portfolio management

Buy-side due diligence:

Organize target company documents by workstream
Grant access to different team members and advisors
Track review progress and identify bottlenecks
Maintain version control and document security

Granular permissions for diligence

Portfolio oversight:

Board materials and monthly reporting
Strategic planning documents and budgets
Add-on acquisition opportunities
Exit preparation and buyer due diligence

Buyer-specific rooms

Best practices for PE data rooms

Organization:

Create clear folder structures (Financial, Legal, Commercial, Operations)
Use consistent naming conventions and version control
Implement document retention policies
Regular cleanup and archiving

Security:

Password protection and two-factor authentication
Granular permissions and access controls
NDA requirements and acceptance tracking
Audit logs and activity monitoring

Analytics:

Track document views and engagement metrics
Identify most active investors and advisors
Monitor review progress and completion rates
Export reports for management and compliance

Document analytics

Common challenges and solutions

Fundraising difficulties

Challenge: First-time fund managers struggle to attract institutional capital Solution:

Start with smaller fund size ($25M-$50M)
Focus on high-net-worth individuals and family offices
Partner with established GPs or consider fund-of-funds
Build strong track record through co-investments

Team building

Challenge: Attracting experienced professionals without established brand Solution:

Offer competitive compensation and equity upside
Emphasize growth opportunities and autonomy
Leverage personal networks and industry relationships
Consider part-time advisors and consultants initially

Deal sourcing

Challenge: Limited deal flow in competitive market Solution:

Develop sector expertise and thought leadership
Build relationships with investment bankers and advisors
Focus on proprietary deal sources and direct outreach
Consider smaller deals or emerging sectors

Operational complexity

Challenge: Managing multiple portfolio companies and investor relations Solution:

Invest in technology and systems from day one
Hire experienced operations professionals
Outsource non-core functions (accounting, legal, compliance)
Develop standardized processes and templates

Timeline and milestones

Phase	Timeline	Key milestones
Planning and setup	Months 1–3	Define investment strategy and team; establish legal structure and compliance; begin fundraising preparation
Fundraising	Months 4–9	Launch fundraising process; meet with potential investors; refine materials based on feedback
Fund closing	Months 10–12	Complete legal documentation; close first round of commitments; begin deal sourcing activities
Operations	Year 2+	Execute first investments; build portfolio and track record; prepare for next fund raise

FAQ

How much capital do I need to start a PE firm?

Most first-time funds raise $50M-$200M, with the general partners typically committing 1-2% personally. You'll also need $2M-$5M in operating capital to cover salaries, office, and expenses during the fundraising period.

What's the typical fee structure for PE funds?

Standard terms are 2% management fee (on committed capital) and 20% carried interest (on profits above 8% preferred return). Management fees typically step down after the investment period ends.

How long does it take to raise a first fund?

First-time fund managers typically spend 12-18 months fundraising, with the first close often taking 6-9 months. The entire fundraising process can extend to 24 months depending on market conditions and investor demand.

Do I need SEC registration?

Yes, if you manage $150M or more in assets. Smaller funds may still need state registration depending on their location and investor base. Consult with legal counsel to determine your specific requirements.

What technology do I need for a PE firm?

Essential systems include CRM for investor relations, data room software for due diligence, accounting software for fund administration, and portfolio monitoring tools. Many firms also use deal sourcing platforms and research databases.