Happy Friday, Funds Family!

A common question on intro calls:

🗣️ “How soon can we close?”

⏩️ The Short Answer

If everything goes smoothly and investors (LPs) sign their documents quickly, you can often go from start to finish in ~4 weeks.

😬 We once did the whole thing in 3 weeks, but that is not recommended (or fun). I would never guarantee a 3-week timeline.

😊 For a comfortable pace, I’d suggest 6 weeks.

📺️ Below is a video outlining our process for forming an investment fund.

Now, let’s dive into the specifics of how long it takes to form a fund 🏊️ 

Step 1: What to do before you talk to a lawyer

To save the most time (and money), you should prepare before contacting a lawyer.

Many lawyers bill by the hour. If you come to them with a half-baked idea and don’t know what you’re talking about, it will cost you. 🙄 

Here’s a list of tasks to complete before getting a lawyer involved:

1. Target your asset class. Determine which specific asset class you want to focus on. In many cases, specific is better than general. Your target investment class will inform the entire fund formation process. 🔎 

2. Decide whether you want a closed-end or open-end fund. We will discuss these fund types in detail in a future post. A closed-end fund is more common in real estate, private equity, and venture capital. These funds have a defined life and investors don’t get liquidity until the end of the fund’s life. Open-end funds are more common in public equities. These funds have no defined term (they can last forever) and investors can withdraw money after a lock-up period. Credit funds can be either.

3. Decide whether you want a multi-asset fund or a single-asset syndication. Please see this article for a breakdown of the costs and benefits of raising a fund or investing on a deal-by-deal basis.

4. Research market terms. Try to get a sense of what the market is in your industry. Ask other GPs. Ask your potential LPs (they’re the ones who matter most). Your lawyer will also help you with this.

5. Draft a preliminary marketing deck. Your deck should include your thesis, tentative terms, and your background. You can adjust this later once you get feedback from your lawyer and potential investors. 📊 

6. Reach out to friends and family. Discuss your offering and solicit feedback. If your friends and family aren’t interested, you may have a lackluster offer. In that case, go back to the drawing board. ✏️ 

7. Collect “soft commitments” from potential investors. Once you hone in on a compelling offering, keep a list of investors who have indicated interest in your fund.

Once you’ve completed this list 📜, you should contact a lawyer to officially kick off the legal process of forming your fund.

Step 2: Legal summary of terms (~1 week)

One of the first things your lawyer will do is help you draft a comprehensive summary of terms for your fund.

This isn’t a 1-pager.

The summary of terms can be 10-20 pages and cover anything an investor would want to know.

✅ Examples of terms to include:

• Fund term (length of fund)

• Investment period

• Distribution waterfall

• Fees

• In-kind distributions

• Clawbacks

• LP advisory committee

• Recycling of capital

• Capital call notices

• Subsequent closings

• Successor funds

• Organizational expenses

• Management fee offsets

• GP removal

• Key person events

• Leverage limitations

• Investment restrictions

• Indemnification

• Withdrawal (including gates and lockups)

• Financial reporting

At our firm, this usually takes anywhere from a day to a week, depending on how complicated the fund is and how busy we are. 📆 

In some cases, if the fund is really complicated and unusual, it might take longer as your lawyer will need input from tax counsel and other specialists. 🤓 

Once your summary of terms is complete, you can revise your marketing deck 📊 to include an updated set of terms. Your lawyer may also have some comments from a securities laws perspective.

Then, you can send the deck + your summary of terms to a wider net of potential investors. 🎣 

Step 3: Fund documents and entity formation (~2-3 weeks)

The next major task is to prepare for your fund’s closing.

Main Fund Documents

Once the summary of terms is finalized, your lawyer can start preparing the key long-form documents to send to investors:

• Limited Partnership Agreement (LPA). This is the main legal agreement governing the relationship between the investment manager (GP) and the passive investors (LPs). This can be anywhere from 40-150 pages depending on the fund/syndication.

• Subscription Documents (Sub Docs): This is what LPs sign to invest in the fund. It includes a legal agreement, an investor questionnaire, and a power of attorney permitting the GP to sign the LPA (and some other documents) on behalf of the LPs. In some cases, the sub docs may also have risk factors and legal disclosures.

• Private Placement Memorandum (PPM): This is the big, official marketing document. A PPM has a split personality. 🎭️ The first half of the PPM is a bunch of positive marketing language enticing prospects to invest. Then…halfway through…something happens. 😬 The PPM turns weary and mentions all of the risks of investing. You could lose all your money! In some cases, smaller funds elect not to have a PPM. In that case, we put the scary legal disclosures in the sub docs instead.

Once you and your lawyer have signed off on these documents, you can ship them to LPs. 📬️ 

Ancillary Fund Documents

In the background, your lawyer will also start preparing less-exciting documents that you’ll sign at the closing.

Examples include:

• Management services agreement

• Closing resolutions

• “Disqualifying Event” questionnaire

• Form ID

• Form D

• Long-form GP agreements (including advisor agreements)

These documents are not typically given to LPs.

🤓 Complex fund structures

Preparing documents can take a lot longer in certain cases, especially when you need to involve multiple law firms.

For example, many real estate funds with non-US LPs set up complex feeder/blocker structures where we need to work with offshore counsel 🗺️ (such as Cayman or BVI) to set up entities outside the United States.

In these cases, you should budget more than 2-3 weeks to get docs out to LPs. 🕜️ 

You should be able to identify any issues that would require special structuring early in the fund formation process.

Step 4: Herd the cats (LPs) 🤠 (? weeks)

Here comes the fun part 🤪 …

There are two main components to getting LPs to sign their documents.

🤝 Investor negotiations

Some investors will negotiate. You can handle negotiations in three ways:

1. Tell them you’re not negotiating

2. Revise the terms of the fund documents (terms change for everyone)

3. Enter into a side letter with certain LPs (terms only change for the LP with a side letter)

We’ll discuss LP negotiations in detail in a future article.

⌛️ But for today’s purposes, you should know that LP negotiations can take a while. I once worked on a ~$200 million private equity fund where it took us months to negotiate with a $30 million anchor investor. All timelines go out the window when this happens.

✍️ Getting LPs to sign the blasted documents

In some funds, LPs are impressively on task and sign the documents promptly.

In many funds…GPs must follow up, follow up, and follow up again. Especially during the summer 🌞 when all the LPs are galavanting somewhere in France or Italy.

Communication is key - let your LPs know the target initial closing date well in advance so they can be ready to sign.

How do LPs sign documents?

We’ll get into this in future articles, but LPs can sign docs in various ways:

• Paper copies (just kidding)

• PDFs

• DocuSign

• Specialized LP onboarding software

💻️ Whenever possible, we prefer to use specialized LP onboarding software. Your lawyer will have recommendations.

Step 5: Hold the initial closing (1 day)

As described in this article on the life cycle of an investment fund, the initial closing date is when you officially admit the first LPs into the fund. The linked article (in the previous sentence) has a list of everything that needs to happen on this magical day 🪄 

(In short, you need to sign a bunch of stuff ✍️ and have your lawyer make some securities filings.)

Once this happens, you’re officially off to the races! 🎉 

As discussed in the article linked above, many funds raise less than their total fundraising goal at the initial closing and continue fundraising ☎️ for another 12-18 months.

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.