Launching a fund: top 5 considerations
21 April 2023
Launching a fund is a complicated process that requires a number of important strategic decisions at key moments. As professional fund administrators, we advise and support clients – including first-time fund managers starting out on their own – on fund formation strategy through execution.
Launching a new fund is a complicated process that requires a number of important strategic decisions at key moments. As professional fund administrators, we advise and support clients – including first-time fund managers starting out on their own – on fund formation strategy through execution.
Fund managers are entrepreneurial and tend to see trends before others do. They have the ideas and the instincts – the only thing they need is an experienced partner to help them navigate the launch and maintenance of their fund.
Many of the managers ZEDRA works with already have significant fund experience based on careers in private equity, investment management firms, or hedge funds. After a successful professional track record, they have a desire and the energy to establish their own funds and deliver investment performance.
“First-time managers want the best guide there is. They are looking for a steady hand who can help them navigate the process and provide surety,” said ZEDRA’s Damien Fitzgerald, Director, Head of Funds, Guernsey.
Below are some important considerations to think through carefully if you’re considering launching a fund.
1 – Jurisdiction, jurisdiction, jurisdiction
One of the most critical decisions a fund manager will make is where to domicile a fund and why any particular jurisdiction is best suited for the specifics of your fund. In this regard, it’s important to consider which geographies you plan to distribute your fund into and your target investor base because this will help drive the decision about jurisdiction.
We understand the differences in the various jurisdictions and can guide you on the right one, depending on your needs. At ZEDRA, we have fund administration expertise in Cayman, Curaçao, Guernsey, Jersey, Luxembourg, the United States and Singapore. We live and work in these communities, have built strong relationships, and can help our clients get work done.
You’ll want to think about on-shore versus off-shore, what investor segments you’re trying to attract, and the fees associated with each plausible jurisdiction. Tax considerations are also an important factor to have on your radar early-on.
If you already have a significant cornerstone investor(s), it’s important to understand what their perception/view of your chosen jurisdiction is. Talk these matters through with a fund administrator who can provide context on jurisdictions based on your fund’s goals.
For example, a Luxembourg manager (referred to as an AIFM) provides the ability to distribute an alternative investment fund (AIF) throughout the Union in a relatively seamless manner and hence reach a wide capital pool. And while the costs could be higher the benefits may also be attractive and Luxembourg could be one of the best fund location choices based on where and how geographically dispersed your investors are located. European kite-marks such as UCITS and AIFs are also very well known in external markets such as in Singapore and hence are widely accepted as a badge of quality.
Many private asset managers tend to be located in the UK (second largest market globally after the US), Switzerland or the Netherlands, two of which are not part of the EU. They also may not have wide distribution networks in Europe and need a more focused approach to fund distribution. This makes the Islands of Guernsey and Jersey (non-EU, but 3rd country equivalent) attractive from a product, regulatory and geographic basis. In these circumstances, capital can be raised from within the EU in a more targeted manner through the National Private Placement Regimes of each European country, as desired.
Further, if you are considering launching a Fund that has an environmental objective alongside its investment objective, Guernsey has the ability to do this through its Guernsey Green Fund (being the first kite-marked “green” investment fund globally) or its new Natural Capital Fund regime. This might be an alternative solution to the Article 8 (ESG) or 9 (Sustainable Investment) SFDR regime in Europe and it also may be more cost effective.
Cayman Islands, British Virgin Islands, Curaçao and the Bahamas are also well-regarded international fund domicile centers with a robust fund support community. Cayman grew its private funds market by nearly 16% from 2012 to 2020 going from 12,695 private funds to 14,679 private funds.
To target the US investor base, the most popular alternative investment vehicles are limited partnerships and limited liability company’s formed under the laws of the State of Delaware. The State of Delaware offers a simple and cost effective formation/registration process, preferential corporate tax treatment, decreased legal liability and litigation for owners/shareholders and privacy protection.
In 2020, business-friendly Singapore issued a new type of fund structure called the Variable Capital Company or VCC. It created more flexibility for funds to be both managed from and domiciled in Singapore. The VCC structure enhances Singapore’s appeal as a jurisdiction. There’s been a growth of funds and family offices in Singapore, primarily driven from China.
2 – Fund structure: open-end versus closed-end
Another critical decision to make at the beginning of the process is fund characteristics and structure.
There are two main types of funds available, open-ended and closed-ended and a broad suite of entity options available to house either of these types. In an open-end fund structure, shares can be issued and redeemed regularly, with new shares being issued to a buyer of the fund or redeemed when a shareholder wants to sell at stated liquidity points. There is typically no limit to the shares that can be issued in an open-end fund. A closed-end fund issues shares or partnership interests only when the fund is launched, or during subsequent closings. If there are no subsequent closings, a new investor would need to acquire shares or interests from existing investors.
In addition to the decision about an open-end versus a closed-end, there are other considerations such as tax, legal, and regulatory which need some close scrutiny. These decisions will be informed by your investment strategy – the type of investments the fund will be acquiring as well as the location of your investors.
You might consider an open-end fund if you’re launching a hedge fund. Usually, an open-end fund is perpetual, unlike a blind-pool closed-end fund which typically has a 10-year life. An open-end fund can and does continue for decades. However, there can still be lock-up periods where investor’s funds are held for a predetermined period of time. As a fund manager, this will give you a chance to prove yourself, so be mindful about how long you set up your lock-up period for.
Conversely, closed-end funds tend to be used for investments in real estate, private equity, private credit, infrastructure or venture capital. Some first-time fund managers will use a closed-end private fund and sell partnership interests to “family and friends” as a first step. Closed-end funds have significantly longer investment time horizons, as mentioned above. An investor shouldn’t expect to receive any sort of return (other than minimal distributions, potentially) for at least five to seven years or thereabouts. As a manager, this will give you the runway for your funds’ investments to perform and deliver the required risk-adjusted returns or money multiples that private asset investors demand for long investment periods and risk.
There are also adjacent structural strategies available such as a Protected Cell Company, or PCC, which ZEDRA offers in Guernsey and in Jersey. In a PCC structure, Cells assets and liabilities are segregated from each other, while some of the PCC costs are shared and there is the potential for establishing some tax efficient PCCs based on choice of jurisdiction. It’s something to keep in mind as you establish the fund.
Decisions about fund structure should be made very early in the launch process, ideally right around the time the jurisdiction decision is being made.
3 – The best fund managers play ‘all in’
Sometimes there’s a misperception that launching a fund can be a wholly outsourced activity and that the fund manager or sponsor doesn’t need to be engaged in the process.
“Setting up and running your own fund is both rewarding and challenging,” said Mark Cleary, ZEDRA’s Funds Director, Jersey. “It’s a good idea to ask yourself if you’re ready to commit the time and resources to the process. The most successful fund launches are those where the manager or sponsor is completely on board and is driving the bus.”
Once the fund is launched, a new comprehensive set of responsibilities will need to be looked after and continually attended to throughout the Fund’s life. For example, ensuring compliance and regulatory expectations are fully met is a key priority, irrespective of jurisdiction, as well as ensuring governance and economic substance requirements are fully satisfied. This is in addition to the day-to-day administrative activities required to ensure the Fund operates smoothly and the ZEDRA team can lead on all aspects of this.
There’s also the opportunity to visit your jurisdiction several times a year for board and related meetings. The jurisdictions – each with its own special culture – are welcoming communities. Visiting regularly can be an enjoyable and beneficial experience.
4 – Compliance and governance
Fulfilling your jurisdiction’s compliance requirements and practicing good corporate and fund governance are table stakes, and should be seen as a backbone prerequisite to a successful fund. All managers have the intention of achieving investment performance, commensurate with risk, for their investors/LPs and one part of the framework for ensuring this is through governance. It’s therefore important to have this at the forefront and engage with administrators who can guide you through the process of working with tax advisors, legal advisors, and auditors, amongst other professionals and ensure board meetings are both effective and timely. An experienced fund administrator can also help guide you through your jurisdiction’s regulatory requirements and how to comply with anti-money laundering (AML) rules and know your customer (KYC) guidelines.
At ZEDRA, our directors and teams can guide you through compliance, operational requirements, and board governance processes. We can also act as your registered Alternative Investment Fund Manager (AIFM) in Luxembourg for European purposes and provide comprehensive third-party ManCo services.
5 – Surround yourself with trusted support partners
The fund formation, launch, and ongoing administration process is foreign to many and therefore can appear complex. It’s critical to have the support of partners who will guide you on your path. At ZEDRA, we have deep relationships throughout the world’s fund ecosystems. We can connect fund managers with accountants, auditors, bankers, legal advisors, tax specialists, and, depending on the fund’s asset class, prime brokers.
Each of our fund engagements is led by a senior level professional. You’ll be supported by a director with deep experience and tenure in the funds business. We make this investment because we believe it distinguishes us and provides us with more opportunities to serve fund creators.
Our clients tell us they appreciate our responsiveness and the quality that’s embedded in our guidance. This is what we do every day, and we take pride in our work.
“Our senior level team forms partnerships with our clients as we guide them through the process alongside their legal advisors,” said Cleary. “We are a human-led business. It’s our people who make the difference and who ensure our relationships endure.”