Thinking of raising your first fund – have you done your homework?
Many investment managers in the real estate, infrastructure and venture/private equity space will start off by sourcing and funding investments on a deal-by-deal basis. For each deal they will pull together a group of investors, agreeing the deal structure, their management discretion and their remuneration specifically for that particular investment. It is hard work. In addition, in a competitive deal environment the uncertainty of funding until the investor group is settled and terms agreed adds an unwelcome level of transaction risk. The siren song of a fund, a pool of committed capital available to fund a series of deals, is seductive.
Factors driving fund structures and terms
However, like a puppy, a fund is a long term commitment. Unlike arrangements set up for a single specific deal to which investors have signed up, a fund:
- will need a longer term strategy and focus investors can buy into and place within their asset allocation strategies;
- has to be an efficient vehicle to accommodate both a universe of possible investors and a range of investments that have yet to be identified; and
- will have more complex reporting and back office requirements, typically falling within the regulatory regimes applicable to passive investment vehicles.
These strategic, structuring, operational considerations all intertwine and will drive the choice of fund vehicle, the fund terms and how the fund may be marketed to investors. Accordingly, for any managers thinking of making this shift – here are a number of key strategic and practical questions to settle on in reasonable detail before getting too far into the structuring process and legal documents. Turning the juggernaut once it is in motion can be expensive.
Investment and strategy
- What type of investments are you mainly targeting?
- In what countries will the investments be based?
- What would your anticipated holding period be and the typical exit strategy?
- Is your target income or capital growth or a mix?
- Will you borrow to invest?
- If you look at your specific deal track record to date how close is this to what you have described?
- How quickly would you expect to be invested?
- Have you identified seed assets already?
Investors and marketing
- What is your target investor base? Institutions and corporates or also individuals (if so, retail or High net worth)?
- Where will your investors come from, the UK, overseas (and if so where)?
- How do you plan to approach them, are they existing contacts or are you planning a wider trawl?
- Have you thought about whether there will be a team investment? How would the team fund this?
- Do you envisage performance incentives such as promote/carry for the team?
Management, operation & infrastructure
- Where will your operational base be? Be realistic!
- As well as sourcing investments do you see yourselves performing related work for a fee (e.g. development or infrastructure management)? Where will you be doing this?
- Have you any existing regulatory authorisations or licences?
- Have you existing back office service providers?
Turning your mind to these questions early on can help you and your advisers focus quickly on the right structure and operating model. They will also help you to identify any features on which you may need to focus in terms of investor disclosure and presentation of your proposition. Doing your homework early on will save time and money.