Happy Friday, Funds Family!

Today we’ll discuss an investment management business’s common team members. 👨‍👩‍👦‍👦 

You can’t do it alone!

💵 Question: Who pays for all this?

First, a quick reminder about how this works.

Investment fund documents have a definition of “Fund Expenses” payable by the fund itself (i.e., the LPs and the GP to the extent of its commitment).

🛑 Things that are not “Fund Expenses”

In general, the salaries of GP personnel (including the principals and any other employees) are not Fund Expenses. Instead, such costs are paid using the management fee.

So, if each GP member gets a salary of $100k per year, and the management fee payable to the GP is $200k, the management fee would be entirely used to pay those salaries. 💸 

Other GP expenses that are not typically Fund Expenses include:

• GP offices

• GP equipment, hardware, and software

• GP-level accounting

• In-house GP personnel

✅ Things that are “Fund Expenses”

Typically, fees paid to third-party service providers are Fund Expenses.

So, if you hire a third party to provide one of the services mentioned below in this article, the fund typically pays for it, outside (in addition to) the management fee.

Other examples of Fund Expenses include:

• Entity formation and filling fees

• Diligence costs

• Travel to find investments

• Taxes

• Indemnification

Now…let’s discuss who you need on your team. 👇️ 

📊 Finance/Underwriting

Investment funds and syndications need someone who can do financial underwriting. This is crucial to any investment business. Some funds have all their financial people in-house. Others might work with outsourced contractors to help fill out their team.

🎨 Designer

Most investment firms have someone making their website and marketing deck look beautiful. As discussed in this article on how long it takes to raise a fund, GPs might choose to gauge interest with a preliminary marketing deck before formally kicking off the process with a lawyer.

⚖️ Lawyer

Lawyers are consistently everyone’s favorite people. At some point, you’ll need a fund formation lawyer.

Your lawyer will be the quarterback throughout the whole fund formation process, including the following:

• Choosing the business and legal terms of your fund/syndication

• Drafting fund documents

• Forming legal entities

• Negotiating with investors

• Handling securities filings with the SEC

After the fund is formed, your lawyer should stick around to help with any ongoing questions or projects you have when running the fund.

Here’s a video outlining our process:

🧮 Fund Administrator

A fund administrator will make your life a lot easier. Your admin will help handle the day-to-day back office work of running a fund or syndication, including:

• Investor onboarding

• Keeping books and records

• Handling expense reimbursements

• Issuing capital calls (getting money from LPs)

• Making distributions (sending money to LPs)

• Coordinating with auditors and other service providers

• Generally serving as the third-party “referee” between the GP and the LPs

We often suggest working with a good fund administrator once your budget supports it. It’s a fund expense! 💸 

📃 CPA

Taxes can get complicated quickly for funds and syndications. You’ll need a good CPA to help you prepare the fund’s tax returns and issue K-1s to LPs.

When interviewing CPAs, ask about their track record for getting K-1s out on time. LPs don’t love receiving their tax forms in August. 📆 

Your CPA can also help with special tax structuring if you have non-US LPs 🌏️, non-US investments, or tax-exempt LPs.

🔍️ Auditor

Many investment funds have their annual financial statements audited. Some investment funds are legally required to have an annual audit (check out this article for more information). Other funds do not need to engage an auditor. Ask your lawyer!

Even if an audit isn’t legally required, larger funds with sophisticated LPs will often have their annual financials audited regardless. If you’re raising more than $50 million (or perhaps even less), LPs may demand an audit.

🛟 Compliance

Many funds have someone dedicated to compliance matters. This is especially true for private equity funds, hedge funds, and credit funds that are Registered Investment Advisors. Check out this article on the Investment Advisers Act for more on whether you might need to register as an RIA.

💻️ Venture capital funds are subject to somewhat easier regulation than private equity, hedge, and credit funds.

🏘️ Real estate funds are generally subject to even less regulation.

Some funds opt to work with an outsourced compliance consultant to help them comply with the Investment Advisers Act and file/update their Form ADV. These consultants are often less expensive than attorneys (but not always).

💸 Fundraising (placement agents)

Funds need to raise money!

Often the GP principals are heavily involved in fundraising, but the GP might also hire dedicated investor relations and fundraising personnel to add fundraising firepower. 🔥 

Some funds work with a placement agent to help them raise money. A placement agent is a FINRA-registered broker-dealer who typically gets a commission for raising capital.

⚠️ Note on placement agents

If you are paying someone to help you raise money, and compensation is conditioned on successful fundraising (“success fees”), please ensure the fundraiser is a registered broker-dealer. Otherwise, both you and the fundraiser may be subject to penalties. Talk to your lawyer!

💰️ Insurance

Funds need all kinds of insurance. In addition to insurance specific to your asset class (e.g., liability insurance, rep and warranty insurance, flood insurance), you might also consider getting Directors and Officers (D&O) Insurance. D&O insurance protects the fund’s principals if they get sued for fund-related matters.

Most fund documents indemnify the GP for lawsuits related to fund matters (in the absence of fraud or gross negligence), but having a second layer of safety is never a bad idea. 🦺 

🏦 Bank

Don’t forget to open bank accounts! Aim to open the fund’s bank account well before the initial closing date. You don’t want to scramble to find a place for investors to send money. 💵 

You generally should open bank accounts for the fund, the GP, and the management company.

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.