Private Equity Fund Structure Explained

[Music] hey guys welcome back to the show so today we're to talk about private equity fund instruction we're gonna go in pull back the curtain and show you the actual guts of what happens inside of private equity funds and this expands to real estate funds hedge funds the whole nine yards but specifically they talking about private equity funds now when I first got involved in this game you know a lot of you guys know my story but I went and met with my dad who at the time is a co-founder of a 20 billion dollar family of real estate funds there's wild and I didn't know that we lived in a small house growing up and I realized he runs this huge funnel dad what are you talking about here and he started to teach me about the fund world because I was always curious about I heard these people that ran private equity funds and they were so much they were so wealthy they're huge amounts of wealth I don't care how long it takes me I'm gonna figure this out and my dad's actually said how to explain this to me and it made a lot of sense and helped me understand what was going on because if you know if you're like me I go out and I've read a dozen or so private equity books and they love to tell you about the sexy deal of this buyout leveraged buyout they did it was so cool habla but no one really walks you through how they structure it how they actually raised the money how they actually got the licenses and SEC compliance with the fund they just talk to you about the cool acquisition they never talk to you about the gut so that is what we're gonna do today on the whiteboard of truth here it is the trustee whiteboard of truth a lot of truth a lot of justice happens on this whiteboard we're gonna talk about that today alright so private equity fund sharks and I met with my dad and this is what he taught me we sat down and talked and I'm gonna go from really simple to pretty complex hopefully and and hopefully share a few things if you like what we're talking about give me a comment or whatever below send me to Instagram DM and I'd love to talk more about if you have other questions okay so my dad sits down he goes Bridger this structure about to explain to you is how 99% of all money is raised in the United States this structure right here now there's other ways to do it but 99% of all money comes through this structure I said okay I'm in this is Bridger in every fund you have at least two entities okay so NC number one is right here this is your general partner you're gonna put GP right here is your general partner this is you this is your fund management and you as the fund manager or the private equity fund they manage funds and the fund is right over here it's different entity and it is called the limited partnership okay and your investors put money and I mix em gonna race this right here 9% your investors or limited partners come up here and you start pitching people they love your idea they have money this is investor I'm gonna put LP right here your LPS you'll kind of hear that terminology I have my LPS that they mean investors put money into the limited partnership from wherever their app and this is a essentially a pool of money the limited partnership is a pool of money that you as the general partner right here can pull from that pool of money and go make investments for private equity companies they're usually buying and selling businesses so they will go and grab this money and they'll go buy a Victoria Secret right Victoria's Secret you're like well I'll just go buy for Victoria Secret yeah you can say can we're partners actually in the process I think they just cancelled it but they were in plans to buy Victoria's Secret they had a fund a limited partnership that went out and that fun buys Victoria sees sometimes they set up special purpose entities right here and then that special purpose entity buys it but that's a separate in T but it's owned by the limited partnership then they can go Apollo Global Management they'll go by Geico okay Geico insurance they go and buy that company how cool is that right to have a fund that goes him PI's other big companies and they go by these companies and depending on the private equity fund and how they want to do it sometimes they will kick out the management teams and they keep them whatever they their plans are for succession and they hopefully are gonna take those companies and maybe one day the IPO maybe one day they sell them to a bigger private equity company maybe one day they go and they break it up into different pieces and they sell those pieces off like Victoria Seaver I think has like pink and these other little brands maybe they break them off and they some individually for more money and what happens is when these investments make money down here and maybe they just hold them right there every money every every year there's kicking off cash the money flows up to the limited partnership and this is a pass-through entity and it gets split to the limited partners and the general partner takes us a piece of that and that's how these fund managers make so much money is they are helping manage these huge deals facilitating billions and billions of dollars and they take a split of that and it turned that little split turns out to be a lot of money I'm gonna dive a little bit deeper that we get so far you guys with me still okay so you're Luna partners put money in you on by thing now there's a very distinct rule about how everyone's paid okay so a limited partners I'm gonna walk you through that right now and we have different videos talking about waterfall structure how that all works but I want to walk you through how everyone is paid okay you have your general partner limited partnership a lot of these funds also have what's called a registered investment advisor are I a now the RIAA or investment advisor advises the fund it gives advice on yes we should buy a Victoria Secret no we shouldn't buy Geico or we should buy this real estate project where we shouldn't the investment of Iser Gibbs and they get paid for their advice so in every fund and there's other beers talk about this I hope you've already seen if you haven't go back on the waterfall structure but there are two different fees there is a management fee and what's called a performance fee and these things are sometimes split out but those are the two main variables inside of a fund its what's interesting it's very precise on where these fees go okay so a limited partnership a lot of people go well it's just an 80/20 split no it's not a little more complex than that okay and on our water function here we go deeper but right here the management fee from the limited partnership goes directly to the registered investment advisor a lot of funds charge a 2% fee and that's if if you make money if you work if you don't work this RA is gonna make 2% no matter what so if you had a billion dollar funds billion dollars that's 20 million dollars a year that goes right to these guys to just pay these fund managers whether they're good fund managers or not they get paid 2% now if the fund makes money usually over your pref the general partner takes the performance fee to different fees Kay performance fee so if the general usually what happens if the fund makes over an 8% return the general partner starts taking what's called carried interest and a lot of buzzwords right now if you don't know I'm talking about go back to the water flush truck sure but that's where the two fees hit differently can change these fees some funds charge a 1% feed some funds do a 70/30 split right you can determine what you want to do in these fees but that's how fund managers make so much money this is we're not we're gonna find any private equity book they don't talk about this structure and the limited partners all get paid pro rata how much money they put in the fund so if for instance is if you put in 4 percent of the total money okay of all the returns going to limited partners you're gonna get 4% back right the amount of money that you have in your gonna get returned back from you that's your pro rata percentage so this guy put in 10 million and this guy put in 2 million and we got returns this year this guy will take home 5 times more than this guy because he risked more money in the fund invested more does that make sense it was that's kind of out structure now this is all under two governing documents and they're called your LPA and your ppm limited partnership agreement and private placement memorandum or P om sometimes these are termed as the Bible okay the Bible I'm gonna write down here the Bible determines all this stuff what's gonna happen how every all the money is moved around so the Bible will say the LPP p.m. will say hey we're gonna charge instead of a 2% we're gonna do a 1.5% management fee okay it's in the Bible you wrote the Bible you got a stick with a Bible but the best part about funds is you get to write the Bible imagine like the religion where you get a write all the rules okay so in here you get to write all the rules as lot now once they're written they're written you got to follow them but you're the one that helps write them in the beginning for your limited prayer so if you're learning partners you say hey once you put money in you've got to keep your money in for eight years in a typical private equity fund they're usually 8 to 10-year funds because year 1 2 & 3 they're gonna go out and buy these Victoria's Secret they're gonna PI GEICO insurance they're gonna season them and by year let's call it 7 they're gonna start trying to sell these companies and hopefully get you a big profit at the ends these are long-term hold funds so they want your money in for a decade so they say hey once you put your money in we have it for a decade and we're gonna give it back to you which is a long time my fund I took my LPA ppm and said now I'm doing something different you put your money with me and it's only a one-year hold so my money's in your money's in for one year with me and after that the six day notice you can pull your money out and that's totally fine because I get to write the bye what's the best thing about fun most questions you're gonna have about fun structure goes well it depends you can do it really however you want as long as it follows the Bible is this making sense so far you guys you still with me this whiteboards getting really messy but hopefully this is the whiteboard of truth and justice hopefully something is has hit you so far now I want teach you a cool rule this is what helped me launch my first fun cuz if you're gonna charge a management fee and a performance fee you need to have a license to do so and you need a license to set up this registered investment advisors usually you need what's called a series 65 to do so if you don't charge a management fee right here and you don't set up a registered investment advisor and you only charge performance feeds meaning I is the fund manager you as the fund manager only make money when the fund makes money yes he says you don't need to have a series 65 interesting so I set up my funds I do not hold a license right now this is how I was able to set things up I only charge performance fees on my fund and I only have a general part I do not have an invest an adviser to do so in my LPN ppm say Bridger is the general partner owner and he gets performance fees only in the fund makes money so if this year though the risk of that is that this year the fund only makes a 6% return I make zero dollars on the phone it's a risk I'm willing to take as a fund manager I put my money where my mouth is with my investors and by the way I'm not pitching anybody I do not want you to invest in my funds I have too much too many investors actually giving me money because we've set up our fee structure in a good way using this model I hope that helps I hope that gave you a little bit of light if you want to go re-watch this video if there was I went a little bit fast I know I talk fast but if you gotta go watch this again check us out but this is how 99% of all funds are raised and this is under what I'm talking about is a form D form D regulation D reg D at 5:06 and and most funds are under 506 B you can also do a 506 C and there's a few other different funds but this form 506 B is how I run my funds that have nine outs and 99% of all money raised in the world comes through that structure hope you guys enjoy and I will see you on the next episode if you liked the stuff hit the subscribe button follow us send it leave us a good comment if you can't hurt something give us a good review or hit me up on Instagram I'd love to hear your questions your comments and everything you guys think about this see you next episode peace

Channel: Bridger Pennington

Views: 132,233

Keywords: private equity fund structure explained, private equity fund structure, private equity fund administration, private equity fund manager, private equity fund of funds, private equity fund set up, how to start a private equity fund, private equity, private equity funds explained, what is private equity, fund, accounting, alternative investments, banking, business, economy, finance, investing, investment, investment banking, investments, money, offer, trade, trading, whiteboard

Id: wkyrh6EHtVc

Length: 12min 15sec (735 seconds)

Published: Fri Jun 12 2020