🛠️ Investment Fund Key Terms, Part 3

🎉 Happy Friday, funds family!

Today, we have Part 3 in our many-part series walking through each term in an investment fund term sheet in detail.

Last week, we discussed 🛠️ Investment objectives. Today, we'll learn about a fund size.

The fund size is essentially a marketing term signaling how much capital a fund or syndication seeks to raise. 💰

As a general rule, the fund size is just a target, and is not legally binding.

However, sometimes guardrails do exist:

⬆️ Caps. Some funds have a cap on the total capital the fund can raise. LPs sometimes request caps so the GP doesn’t raise too much money and start deploying capital indiscriminately. For example, a fund with a $200 million target might have a cap at $250 million.

⬇️ Floors. Less common, but sometimes funds have a minimum viable capital raise. If the GP can’t raise a certain amount of money (let’s say $50 million out of a $150 million target), the fund can’t hold an initial closing.

As a side note, anchor LPs sometimes have “ratcheting” commitments that are tied to the fund size. For example, an LP’s commitment might be the lesser of $10 million and 25% of the fund.

⚖️ Another thing to consider is the fund size’s effect on your exemptions from securities laws. In many asset classes (private equity, private credit, and others), managers must register with the SEC as “Registered Investment Advisers” once their regulatory assets under management exceed $150 million. As a result, some emerging managers target less than $150 million for their first fund so they can avoid extra regulatory scrutiny (until they raise Fund II).

So how much money should you raise? What’s normal?

A common progression for first-time GPs looks something like the following:

1️⃣ Fund 1: $10-50 million
2️⃣ Fund 2: $50-150 million
3️⃣ Fund 3: $150 million+

In practice, fundraising targets are all over the place, and many GPs simply raise “as much money as they can” 😊

🗓️Next up in Part 4, we’ll discuss minimum LP check sizes.

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.