Aspiring fund managers often ask the time required to start a fund, the typical lifecycle of a fund, and what preliminary steps they should take. While the answer can vary depending on the specifics, this article serves to provide private fund managers with insights on steps to take and what to expect throughout the process.
1. Preliminary Steps
Before committing to starting a fund, establishing a solid foundation is crucial for ensuring the fund’s success. Generally, aspiring fund managers should establish a track record through individual deals or syndications. This experience not only provides valuable insights into the capital-raising and investor relations process, but it also establishes credibility and fosters trust with investors. This step will take the longest due to the time and effort required to build a solid track record and exit deals successfully.
It is also important to assemble a competent team. This team should include key personnel for the fund itself as well as essential service providers such as attorneys, CPAs, and fund administrators who will help ensure the fund is structured correctly. Additionally, optional service providers like compliance companies, consultants, and audit firms can play a vital role in overseeing and managing the fund’s operational and compliance aspects. Ideally, the fund’s key personnel should each contribute diverse and unique backgrounds that enhance the fund’s ability to make investment decisions and manage risk.
Comprehensive research on market terms is also imperative to gauge current conditions and trends as well as identify your investor’s expectations. This research will allow you to determine attractive and competitive terms for potential investors. Developing a detailed business plan outlining your fund’s strategy, investment criteria, and investment objectives helps bring your vision to life and streamlines the fund formation process. Similarly, you should develop a concise pitch deck of around 10 to 15 slides detailing what you are offering investors and clearly articulating your fund’s unique value proposition, investment strategy, and objectives.
2. Form Your Fund
Once you’ve laid the groundwork through the preliminary steps, it is time to work on forming your fund. This phase involves several critical steps to document and finalize the fund’s structure.
First, you’ll need to work with an attorney to determine fund’s legal structure. Typically, for a basic fund, you’ll need to form the main issuer entity and a management entity as the manager or general partner of the fund. We typically recommend for you to form the main issuer entity as a limited liability company. However, limited partnerships tend to make more sense for hedge funds. You’ll also need to determine if you will be offering different classes of interests to investors. For more complex structures, you may consider forming an investment management entity or entities to allow for a master feeder structure. Depending on the state you form your entities in and any complexity in the fund’s structure, this process can take a few days to a few weeks.
Next, your attorney will prepare the main fund documents. These include an operating or limited partnership agreement for the fund, a private placement memorandum, and a subscription agreement. These documents outline the terms of the fund, the rights and obligations of investors, and the legal and regulatory framework. It is crucial to work out all critical details with your attorney, including whether you will accept accredited or unaccredited investors, the possibility of advertising, the expected number of investors, the asset classes you will invest in, how distributions will flow to investors, and any fees you are taking. Assuming there aren’t any major issues or delays arise, the timeline to draft and finalize these documents can take approximately 4-8 weeks.
Simultaneously with the preparation of the fund documents, you should also develop your marketing strategy and how you will pitch the fund to investors. This process should include finalizing the initial pitch deck you developed as part of your preliminary steps. This often goes hand in hand with preparation of the offering documents as your attorney will need to ensure that what you tell investors aligns with the fund documents and all necessary details and risks are disclosed.
3. Launch Your Fund
Once your structure is established, entities are formed, and fund documents are finalized, it’s time to officially launch your fund. You will need to pitch your fund to investors and provide them with the opportunity to review the company agreement, PPM, and subscription agreement. For investors who wish to invest, you will need to gather necessary commitments and signatures to launch operations.
Importantly, after the first sale of securities, fund managers must file all necessary federal and state securities filings. This involves filing a Form D with the SEC within 15 days of the first sale of securities, which is typically when you subscribe your first investor. Additionally, blue sky filings must be made in each state where your investors are from.
The timeline to raise capital depends on your specific projects and investor base. Typically, this can take a few weeks to a year.
4. Ongoing Reporting and Compliance
Once your fund is operational, fund management and investor relations becomes critical. This requires ongoing portfolio management, risk assessment, and performance monitoring to ensure alignment with investment objectives. Maintaining regular communication with investors throughout the fund’s term, even if you might be conveying bad news, is critical. This includes updates on performance, market conditions, and significant developments.
Furthermore, as you subscribe new investors, you will need to ensure that you remain on top of securities filings which includes filing a state blue sky filing in each state a new investor is from and filing your federal Form D filing each year that you subscribe investors.
Each year you will also need to provide investors with IRS Form 1065 Schedule K-1 to report each investor’s share of the fund’s profits and losses within the timeline set forth in the fund’s company agreement.
5. Exiting and Winding Up the Fund
Near expiration of the fund’s term or whenever you are ready to wind up your fund, you will need to liquidate the assets, pay off debts, and make distributions to investors. The company agreement of the fund should include details on how this will work.
By understanding each phase of the fund’s lifecycle, aspiring fund managers can bolster their chances of success and establish a strong reputation among investors. For any questions or assistance in structuring your fund or preparing your fund documents, please do not hesitate to reach out – we’re here to help!