🛠️ Investment Fund/Syndication Glossary of Terms

🎉 Happy Friday, funds family!

Here's a no-frills glossary of key terms you might hear in the world of investment funds and syndications.

This glossary, including references to the relevant chapters, is included in my book 🔗 Fundamentals: Your Friendly Guide to Investment Funds and Syndications.

3(c)(1): Investment Company Act exemption for private funds with no more than one hundred investors.

3(c)(5)(C): Investment Company Act exemption for funds primarily investing in real estate or real estate–related assets (such as mortgages).

3(c)(7): Investment Company Act exemption for private funds that accept only qualified purchasers.

506(b): Regulation D exemption allowing private offerings to accredited investors and up to thirty-five non-accredited investors without public solicitation.

506(c): Regulation D exemption allowing private offerings with general solicitation to accredited investors.

Accredited Investor: An individual or entity who meets certain financial or professional eligibility criteria for participating in Regulation D securities offerings. This classification has a lower bar than “qualified client” or “qualified purchaser.”

Acquisition Fee: A fee paid to the GP for acquiring an asset, typically a percentage of the purchase price.

Administrator: A service provider that handles certain operations of a fund, like bookkeeping, reporting, and making capital calls.

American Waterfall: A distribution method calculating carried interest on a deal-by-deal basis.

Auditor: A professional who verifies the accuracy of a fund’s financial statements.

Blocker: An entity, often structured as a corporation, used to shield certain investors (like non-US persons or tax-exempt entities) from direct exposure to income such as ECI or UBTI.

Blue Sky Filings: Regulatory filings required to ensure the legal compliance of securities offerings at the state level.

Blue Sky Laws: State regulations governing the offering and sale of securities to protect investors.

Capital Call: A request from the GP to LPs to provide their committed capital.

Capital Commitment: The total amount an investor agrees to contribute to a fund, typically drawn down over time through capital calls.

Capital Contribution: The actual funds paid by an investor into the fund, fulfilling part or all of their capital commitment.

Carried Interest: The GP’s share of the fund’s profits.

Cause Event: A specific violation, such as fraud or breach of fiduciary duty, triggering the removal of a key person or general partner as outlined in the fund agreement.

Clawback: A provision requiring GPs to return excess carried interest.

Closed-End Fund: A fund with a defined term and investment period, commonly used for illiquid assets.

Co-Investment: An LP’s right to invest alongside the fund in specific deals.

Compliance Consultant: An advisor ensuring adherence to regulatory requirements. Especially important to RIAs and ERAs.

Continuation Fund: A new fund created to retain and manage select assets beyond the original fund’s term.

Defaulting Partner: A partner who fails to meet their obligations, such as making a capital contribution, and is subject to certain agreed-upon penalties.

Distribution: Payments made in cash or in kind to investors from the fund, often including returns of capital, profits, or other proceeds.

Distributions in Kind: Non-cash distributions, such as property or shares, to LPs.

Effectively Connected Income (ECI): Income linked to a trade or business within the US, subject to US taxation.

Employer Identification Number (EIN): A unique tax ID number assigned to entities by the IRS for tax filing and reporting purposes.

European Waterfall: A distribution method where profits are netted across all investments before GPs receive carried interest.

Evergreen Fund: An open-end fund designed to operate indefinitely.

Exempt Reporting Adviser: An adviser managing private funds under 3(c)(1) or 3(c)(7) exemptions, required to file Part 1A of Form ADV with the SEC or state regulators.

Fee Waiver: An agreement whereby a GP waives payment of a fee (e.g., management fee or acquisition fee) in exchange for a “profits interest” in the fund.

Feeder Fund: A smaller fund feeding into a larger, master fund. Often important when the fund has non-US or tax-exempt investors.

Final Closing Date: The last date on which new LPs can join a closed-end fund.

Follow-On Investment: Additional investment in a portfolio company or asset already owned by the fund.

Foreign Investment in Real Property Tax Act (FIRPTA): US legislation governing tax on gains from the sale of US real property interests by foreign investors.

Form ADV: A form filed with the SEC that provides details about an investment adviser’s business, fees, and background.

Form D: A notice filed with the SEC by companies to inform the regulator of securities offerings and provide basic details about the offering.

Fund: A pool of money collected from LPs and managed by a GP to invest in various assets with the goal of earning a return.

Fund Expenses: Costs incurred by the fund, such as legal fees, diligence costs, and audits.

Fundraising Period: The timeframe during which a fund actively seeks commitments from investors before a final closing.

Gate: A restriction limiting how much LPs can withdraw in a given period.

General Partner (GP): The entity managing the fund, making decisions, and earning carried interest.

GP Catch-Up: A distribution provision allowing the GP to receive their share of profits after LPs get their preferred returns.

GP Commitment: The GP’s investment in the fund, typically 1–10 percent of total commitments.

GP Expenses: Costs incurred by the GP in managing the fund, which may or may not be reimbursable by the fund.

GP Removal Clause: Terms under which LPs can remove the GP, with or without cause.

Guarantee Fee: A fee paid for personally guaranteeing fund-related debt.

Initial Closing Date: The first date on which LPs are formally admitted to the fund.

Investment Adviser: An entity providing advice on investments for compensation.

Investment Advisers Act: US legislation regulating investment advisers.

Investment Company Act: US legislation regulating investment companies.

Investment Period: The timeframe during which a fund can make new investments.

K-1: A form issued to LPs detailing their share of fund income for tax purposes.

Key Person Event: A clause triggered when a designated GP fails to meet their time-commitment obligations and that results in a suspension period prohibiting the fund from making new investments.

Key Persons: Individuals identified in the fund agreement whose involvement is critical to the fund’s operation. Their departure may trigger specific events or remedies.

Late Admission Fee: A fee paid by LPs joining after the initial closing, compensating earlier investors.

Limited Partner (LP): Passive investors contributing capital to the fund.

LP Advisory Committee (LPAC): A group of key LPs who advise on fund matters.

Limited Partnership Agreement (LPA): The governing document outlining a fund’s terms. Applicable if the fund is a limited partnership.

Lockup Period: The timeframe during which LPs cannot withdraw their investments.

Management Company (ManCo): The operating entity managing the fund’s daily activities.

Management Fee: Recurring fees paid to the GP or ManCo for fund management services.

Management Fee Offset: A reduction in the management fee due to certain events, such as transaction fees received by the manager or costs exceeding predefined caps.

Marketing Deck: A presentation used to communicate the fund's investment thesis, terms, and team to potential investors.

Master Fund: The main investment vehicle into which feeder funds pool their capital. Often important when the fund has non-US or tax-exempt investors.

North American Securities Administrators Association (NASAA): A group of North American securities regulators focused on investor protection and market regulation that oversees tools like the EFD for filing Form D and Blue Sky filings.

Open-End Fund: A fund with no fixed term, allowing ongoing investments and withdrawals.

Operating Agreement: The governing document outlining a fund’s terms. Applicable if the fund is an LLC.

Organizational Expenses: Costs associated with establishing the fund, such as legal and accounting fees, are sometimes capped and allocated per the fund agreement.

Parallel Fund: An investment vehicle operating alongside the primary fund and investing in the same assets under similar terms, often created for specific investor groups.

Placement Agent: A FINRA-licensed broker-dealer who assists in raising capital for a fund.

Preferred Return: A baseline return distributed to LPs before sharing profits with GPs.

Private Fund Exemption: Regulatory provisions allowing funds to avoid registration with the SEC, typically available to managers with less than $150 million in assets under management.

Private Placement Memorandum (PPM): A document detailing the terms and risks of investing in a fund.

Profits Interest: An equity interest other than a capital interest in a partnership or LLC that grants the holder a share of future profits or appreciation in value.

Qualified Client (QC): An investor meeting specific criteria under the Investment Advisers Act who is eligible to invest in certain RIA-sponsored funds. This classification has a higher bar than “accredited investor” but a lower bar than “qualified purchaser.”

Qualified Purchaser (QP): An investor meeting certain criteria under the Investment Company Act who is eligible to invest in 3(c)(7) funds. This classification has a higher bar than “accredited investor” or “qualified client.”

Registered Investment Adviser (RIA): A person or firm registered to provide investment advice for compensation who is required to file Form ADV detailing their business practices and fees.

Regulation D (Reg D): Exemptions under the Securities Act allowing private securities offerings without registration, including Rule 506(b) and Rule 506(c).

Secondaries: Shares in a company bought from a third party.

Securities Act of 1933 (Securities Act): Legislation requiring issuers to register securities offerings with the SEC unless an exemption applies.

Securities and Exchange Commission (SEC): The US agency that regulates investment funds and securities markets and protects investors.

Security: A financial instrument, like stocks, bonds, or fund interests, that represents ownership, debt, or a right to share in profits.

Soft Commitment: An informal agreement by LPs to invest, pending formal documentation.

Special Purpose Vehicle (SPV): A legal entity created for specific investments (often just one asset). Also called a “syndication.”

Subscription Agreement (Subscription Documents or Sub Docs): A document through which LPs commit to investing in a fund.

Successor Fund: A subsequent fund raised by the GP, often after the current fund’s investment period ends.

Summary of Terms: A summary of the key terms of a fund provided to potential LPs.

Syndication: A legal entity created for specific investments (often just one asset). Also called an “SPV.”

Term: The length of time a fund is active, typically including an investment period and a wind-down period before it ends.

Transaction Fee: Fees, such as board fees, monitoring fees, or similar, [MH6] paid to the ManCo (or an affiliate) directly from a portfolio company that may reduce the management fee.

Unrelated Business Taxable Income(UBTI): Income generated by tax-exempt entities from activities unrelated to their exempt purpose, subject to taxation.

Venture Capital Exemption: A rule that lets venture capital fund managers avoid SEC registration if they follow certain rules.

Warehoused Investments: Assets purchased by the GP before the fund’s initial closing and intended to be transferred into the fund once it is established.

Waterfall: The order in which profits are allocated between LPs and GPs. This is usually under the title of Distributions in the LPA.

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.