How’s it going, everyone? Today, I’m presenting a beginner’s guide to funds – VC, PE, RE, etc.
In today’s blog we’ll go over what funds are, how people make money, and who invests in them!
My name is Bridger Pennington, and I’ve started 3 investment funds and co-founded Fund Launch.
I’ve also helped 20,000 people get started in the fund world!
Let’s dive into the discussion of these 5 funds…
- hedge fund
- private equity
- real estate
- venture capital
- debt fund
Similarities
Put simply, it’s a pool of investors’ money that the fund manager draws on to make investments.
When those investments make money (have a return), the money flows back to the investors and the fund manager.
All the funds mentioned above operate in this way. It’s not that complicated!
Differences
They all function the same way, but the capital is invested in various ways.
Hedge funds invest in public companies or securities, or anything publicly traded.
On the other hand, private equity funds invest in private companies.
For example, the PE firm, Sycamore Partners, invests in Staples, Aeropostale, and Nine West.
Real estate funds use their pooled capital to buy… real estate.
This includes single-family homes, duplexes, and apartment complexes.
I know a guy who flipped 75 houses using a real estate fund!
Ever seen Shark Tank? Yes, this is an example of venture capital.
The pool of money is used to invest in promising start-up companies.
Debt funds issue debt through loans and mortgages.
Real Terms
The pool of capital is technically called a Limited Partnership (LP) or fund.
Limited Partners, the official term for investors, put capital in the LP.
And, instead of calling them a fund manager, call them the General Partner (GP).
The GP calls capital into the LP when they need it, and they decide where the investments are made.
The 2/20 Split
Let’s talk about the split of returns between the GP and the LPs.
2/20 means that the fund manager earns a 2% management fee along with 20% of the investment return (the other 80% goes to the LPs).
However, there is no one right way to do this. Some fund managers charge a 3% management fee and split the returns 70/30, for example.
LPA & PPM
These 2 documents govern your Limited Partnership (fund).
The Limited Partnership Agreement (LPA) and the Private Placement Memorandum (PPM) can be about 100 pages long and cost you anywhere from $30k to $100K!
Why it’s for You
If you’re a successful business owner, salesman, or entrepreneur, you know that businesses are scalable.
Funds are scalable as well! Running a $100K fund could be structured the same as a $10B fund!
Who Invests in These Funds?
- Non-Accredited Investor (regular Joe)
- Accredited Investor (worth $1M, makes $200K alone a year, or $300K with spouse)
- Qualified Client ($2.2M net worth)
- Qualified Purchaser ($5M net worth or $25M in assets)
The SEC wants to protect non-accredited investors by not letting them invest in funds; there are some swindlers out there!
Some funds only let qualified purchasers in on their funds!
Conclusion
Well, I hope you learned more about funds on this beginner’s guide to funds!
You can be a fund manager one day!
Visit Fund Launch to learn more…
Thanks,
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the author