How to start a private equity fund in Canada: A step-by-step guide

To start a private equity fund in Canada, investors and managers must overcome several legal, financial, and operational hurdles. But with the right legal advice, jumpstarting this fund becomes much easier.

In addition to discussing the steps on how to start a private equity fund, this article will talk about the issues in establishing and operating PE funds under Canadian law. If you want to learn more, you can consult a private equity lawyer.

What are the steps to starting a private equity fund in Canada?

Pamela Hilderman and Sean MacLachlan, partners at MLT Aikins, shared insights into the steps in starting a private equity fund in Canada. 

They say that starting a private equity fund involves the following:  

• defining the investment strategy and structure, which includes addressing regulatory and legal requirements 
• forming the initial fund, which is often a limited partnership, and the management entities 

Here's a simple breakdown of how to start a private equity fund: 

1. Consult a private equity lawyer
2. Create the business plan for the fund
3. Set up the General Partner (GP)
4. Comply with registration and licensing requirements
5. Raise capital from Limited Partners (LPs)

We'll discuss these steps below in more detail. You can also use the table of contents above to go directly to any of these steps.

1. Consult a private equity lawyer

It is helpful to have a lawyer involved, because private equity funds are governed by Canadian law and involve large amounts of capital. Here are some of the ways private equity lawyers can help you start a private equity fund:

• orienting managers on applicable laws: aside from having the necessary financial expertise, the people behind the fund should be aware of the laws that govern private equity funds, such as the Competition Act and the Investment Canada Act
• structuring the private equity firm: managers can work with their lawyer to understand how private equity firms are structured, how they operate and the main benefits and risks of starting a PE firm
• drafting of legal and regulatory documents: several formal documents must be prepared for the newly formed private equity firm, including limited partnership documents and compliance filings
• conducting legal due diligence: private equity firms conduct legal due diligence not just when they look for possible investors, but also when they evaluate companies to acquire; here, lawyers are at the forefront of conducting due diligence in private equity

If you want to find out about how private equity firms work, watch this video:

Reach out to the best private equity lawyer in Canada as ranked by Lexpert if you want to learn more about how to start a private equity fund.

2. Create the business plan for the fund

A private equity fund starts with a clear, written business plan. This plan must explain:

• the fund's focused investment strategy: this narrows down where the fund will invest capital
• where it will invest the funds: the fund should specify which country or region it will invest in
• the fund's term: this specifies the fund's life and the period when investors expect their capital to be returned

3. Establish the legal entities

Setting up the GP entity includes establishing the different teams or divisions composing it. This includes teams for the following departments:

• legal
• accounting
• administrative

Hilderman says that forming the management entities requires drafting and settling key documents, including the: 

• limited partnership agreement 
• management services agreement 
• form of subscription to be used for prospective investors (LPs) 
• shareholders’ agreement for the GP, should it be necessary 

The job of the General or Managing Partner

The GP's roles should be clear so that everyone is aligned even before day one.

While the private equity firm raises capital from the LPs, the GP manages these funds. The GP or Managing Partner (MP) is generally responsible for:

• administration of the firm's funds
• investing the funds according to plan
• making decisions for the firm
• other day-to-day operations

The capital raised may be used for numerous investment purposes, such as:

• acquiring and developing other companies
• producing new goods, products, or technologies
• expanding another company's working capital

“First time fund managers should be prepared for larger investors to request or require side letters to provide the investor with rights and entitlements that are not set out in the limited partnership agreement but are required by the investor as a condition of becoming a limited partner,” Hilderman says. 

4. Comply with registration and licensing requirements

Once the GP is in place, the next step is looking at the different legal requirements for registration and licensing with securities regulatory bodies. This becomes tricky in case the fund operates in the US or other foreign countries. For this, it's better to consult a cross-border lawyer, who knows both the Canadian and foreign laws for private equity funds.

MacLachlan says that “the manager will need to establish internal processes to ensure ongoing compliance with applicable laws, reporting to limited partners, and adhering to the governance structure and internal policies set out in the limited partnership agreement, management agreement and any other side letters that may have been entered into.” 

Canadian laws governing private equity funds

“When forming a private equity fund in Canada, there are a number of laws that apply,” MacLachlan says. These laws include: 

• applicable securities laws relating to the distribution of securities of the fund to investors (LPs) 
• registration requirements applicable to the manager, the GP and certain of their employees 
• partnership and corporate laws and regulations 
• tax legislation 
• anti-money laundering requirements and applicable privacy legislations 

“If foreign investors and/or investments are going to be considered, then engagement of foreign counsel to ensure compliance with foreign laws will be required,” MacLachlan adds. He cites the following laws must be followed if US investors are allowed: 

• securities applicable to raising capital in the US  
• tax laws applicable to foreign partners need to be considered and involve additional structuring considerations 
• Canadian laws applicable to foreign investment 

Canadian law on securities

Under the different securities regulator of each Canadian province, every firm engaged in trading or advising of investment funds must be registered. Managers or the private equity fund itself must be registered under the following categories if they're also involved in these activities:

• dealer: if engaged in the business of trading in securities
• adviser: if engaged in the business of advising others on investing in, buying, or selling securities
• manager: for those managing the business, operations, or affairs of an investment fund

Whenever applicable, registration may be a combination of any of these titles.

Aside from talking to a private equity lawyer, you can consult an investment funds lawyer to learn more about this registration requirement.

Limitations on Limited Partners' involvement

While the GP has unlimited liability under Canadian law, the LPs must not be involved in the management of the partnership's business to maintain their limited liability status. While representatives of the LPs may be part of the fund's advisory committee, they're still not involved in any decision-making to prevent risking their limited liability status.

Prohibition on misrepresentations

As with other contracts, misrepresentations can lead to liability and other remedies under the securities laws of the relevant Canadian province. This applies to any representation in the:

• prospectus
• offering memorandum
• private placement memorandum

In all the GP's dealings, it is required that all relevant information be disclosed to the prospective LPs (and the same goes for the LPs). This includes any information disclosed:

• during the due diligence stage
• in drafting the limited partnership agreement, or
• in any other document necessary for an investment deal

5. Raise capital from Limited Partners

Growing the fund's capital is often the hardest part of starting a private equity fund. “As the initial set-up is taking place, the individuals will be seeking capital commitments, so the fund has capital to deploy,” Hilderman says. “The fundraising process for a first-time fund manager is typically the most challenging step and can take many months to secure sufficient funds for a first closing.” 

The capital‐raising plan must be as clear and concrete as the investment strategy. Here are some of the factors to consider when raising capital for the fund: 

• marketing plan: the fund managers must know who the target investors are, which will dictate how the fund will present itself to the world through its marketing strategies
• investor updates: raising capital is only the start of the relationship; investors must be regularly updated through LP meetings and agreed reporting processes

Lastly, the “subsequent closing can occur subject to the terms of the limited partnership agreement,” she adds. 

What are the issues to consider when starting a private equity fund?

There are some practical considerations for both GPs and LPs, but most especially for the fund managers, when starting a private equity fund in Canada.

Who can start a private equity fund

Private equity funds are usually led by sponsors who understand the world of investments and securities. They do not have to be high-net-worth individuals or large institutions, but they do need clear strategies and enough experience to win their potential investors' trust.

Here's a video explaining how private equity firms and their partners earn money:

You can contact these Lexpert-ranked best law firms for private equity in Canada if you want to start a private equity fund.

Alignment of interests

The LPs and the GP must have aligned interests to build a strong foundation for the fund. There are two ways to do this:

• GP contributing to the fund: the GP may make a meaningful contribution to the fund to align its interests with the LPs. The GP's contribution often ranges from 1% to 5%, based on market practice and the parties' agreement
• LPs contributing to the management: In addition, LPs may also fund management or operational expenses up to a certain cap, and the GP would then be responsible for the expenses exceeding this cap.

“The goal is to ensure the founders are aligned from inception,” Hilderman says. “Being aligned on timelines and objectives of the fund and developing a culture of regular communication between management and legal counsel is important for the success of the fund and key to success.” 

Agreement on the returns

Interest in the returns of the fund is also one way to ensure that both the LPs and GP are aligned. As to the amount of the returns:

• for LPs: their investment capital must be repaid, on top of the agreed priority return based on the parties' agreement; this can be subject to write-downs on unrealized investments, in relation to the nature of investments, which may or may not bear future returns
• for GPs: their entitlement to the "carry" of the investments must be realized after giving the LPs their due; also, this carried interest can be the subject of a clawback or escrow provision, which applies when the fund is liquidated

The rate of the LPs' priority return and the GP's carry rate depend entirely on the parties' agreement.

Fees for the General Partner

While fees are generally set by agreement between the parties, management fees are usually tied to the size of the invested funds. This means that for large investments, parties are inclined to reduce the management fees so that interests between the GP and LPs are aligned. The other way applies for smaller investments.

Management fees

In Canada, management fees may range from 2% to 2.2%, based on the investors' committed capital. The parties usually agree on management fees at the start, along with other fees such as:

• breakup fees
• monitoring fees
• consulting fees
• directory fees

Performance fees

These management fees contrast with performance fees, which are paid to the GP or fund manager when the fund generates positive returns. Most performance fees range from 15% to 25% based on the profits of the investment funds.

How can lawyers help with starting a private equity fund? 

“Our role spans the full lifecycle of fund formation and operation, ensuring that founders receive comprehensive legal, regulatory, and strategic support at every stage,” MacLachlan says. 

Here are some of the ways lawyers can help clients who want to start a private equity fund, according to Hilderman and MacLachlan: 

• Structuring the fund: “At the outset, we collaborate with founders to define an appropriate structure for the fund, focusing on liability protection, tax efficiency, investor expectations and long‑term scalability. We provide strategic guidance on how the fund should be organized and how the structure aligns with the fund’s broader investment strategy. We take the lead in drafting and negotiating all core fund documents, ensuring they are all aligned with market standards and investor goals.” 
• Helping with legal compliance: “Our team navigates the complex tax and securities law requirements applicable to private equity funds, providing founders with clear direction on registration obligations, prospectus exemptions, marketing rules and ongoing compliance. Our tax professionals work with external advisors to implement efficient tax structures that optimizes carried interest, management fees, investor returns and cross‑border considerations (when applicable).” 
• Post-founding support: “Once the fund is formed, we continue to support clients with fundraising strategy, investor onboarding, operational setup, and the development of governance frameworks. This includes preparing compliance manuals, privacy policies, and reporting protocols to ensure the fund operates effectively and meets its obligations. As the fund grows, we assist with investments, portfolio management, board oversight and ongoing governance matters.” 

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