Q&A: Benefits of Setting up a Private Fund

What is a private fund?

Mark Cleary: A private fund is a vehicle to pool capital from at least two unrelated individuals, and which operates on the basis of risk spreading. Further, it will not be available for investment to the general public. Hedge funds and private equity funds are two of the most common types of private investment funds. Private funds can also take the form of debt funds, real estate or other alternative asset funds.

Tell me about the clients you support who start up private funds.

Damien Fitzgerald: We support a wide variety of clients at ZEDRA from established market firms to wholly new enterprises and we are proud to support them all on their journeys. Some of our clients are in the first-time fund manager space, and typically already possess significant fundraising and investment expertise. This is typically manifested through a successful track record in private equity firms, investment banking, or with a hedge fund manager. They also tend to be entrepreneurial, have good instincts, and are looking to start out on their own.

From a fund manager’s perspective, why is a private fund attractive?

Damien Fitzgerald: There are several reasons – let’s hone in on four:

1. regulatory light
2. the opportunity for a fund manager to build a track record
3. the ability to stay close to your investors
4. cost savings.

What does “regulatory light” mean?

Mark Cleary: “Regulatory light” does not mean no regulation. When it comes to critical areas such as compliance with anti-money laundering (AML) guidelines, there’s exactly the same regulation and compliance requirements for a private fund vis a vis a more regulated fund vehicle.

The most fundamental benefits of “regulatory light” derives because professional investors do not need the same level of regulatory protection as retail investors and consequently, much more flexibility is generally permitted in structuring, investment risk, and asset classes. Regulatory light also provides for a short regulatory launch period and therefore for a manager to be very responsive to market demand, and no hard requirement for a scheme particulars or for an annual audit (if Jersey based).

Damien Fitzgerald: On a related point, both Guernsey and Jersey have been an integral part of the fund administration ecosystem for decades. We have established relationships with the regulators who provide both quality and timeliness in terms of their responses and communications to us. In turn, we take our responsibilities and commitment to quality seriously.

How does a first time fund manager go about building a track record?

Damien Fitzgerald: Quite often, a first-time fund manager establishes a fund for family and friends to invest in. Their objective is to be successful with the initial fund, and then build off of that success with subsequent funds. In my experience, it would be a challenge for a first-time manager to launch immediately into a fully authorised/regulated Class B fund in Guernsey. First, you need to build up a track record and then trust develops once you’ve demonstrated positive results. Then, you’ve started to build momentum. If the first fund is a success, then a manager can consider follow-on funds and whether or not those can be larger in size.

Mark Cleary: And a quick word about the number of investors permitted to be admitted into private funds in Guernsey and Jersey. While both Islands have slightly different rules, in substance private funds in Guernsey and Jersey limit the total number of investors to fifty. . So, you could have a private fund with 50 professional, institutional, or ultra-high-net-worth individuals with a total fund raise of a very significant amount.

There’s no ceiling to the amount of capital raised by a fund, just the total number of individual investors in the fund. This is something to keep in mind as a manager moves through successive funds, as it may mean a move out of the respective private fund regime into one which allows for more than 50 investors. A route that does make sense for a first-time manager is to engage early with an experienced fund administrator who can support them with the nuts and bolts of regulation, compliance, governance, and administration.

Let’s delve a little further into how a manager builds a foundation to be successful. What do they actually need to do?

Mark Cleary: Point zero is always a sound investment thesis coupled with an ability to communicate it in an authentic way. These two components will enable any prospective manager to discuss their thesis broadly (likely with persons who are already known to them) and who might be aligned on both the opportunity and the expected risk. Interest will begin to build in a concept amongst potential investors.

Then, building off of that, there are several important decisions a manager should consider. For example, in what jurisdiction should the fund be domiciled? And why is any one jurisdiction more suitable than another? Having determined jurisdiction, next consider what might be the ideal fund structure given the selected investment strategy and investors? The most basic option to consider is whether an open-ended or a closed-ended fund would be most suitable, but there are many other associated considerations on the legal form, regulation, fund mechanics, etc.

You’ll also want to secure an experienced fund administrator and other support partners such as legal counsel and possibly tax advisors who can guide you throughout the journey. As much as hard professional skills, relationships are vitally important to success, so spend some time on finding the right trusted partners. Finally, be aware that the process of launching a fund, even a private one, can be quite intense and therefore be prepared to commit time to the process. That’s sometimes overlooked, but we can say from experience, it’s essential.

And can you say more about staying close to your investors?

Damien Fitzgerald: Before approaching a fund administration firm, you should be well on the way to having your investors lined up. That’s not in the purview of a fund administration firm and that’s important to keep in mind. With a private fund, you’ll have a much closer relationship with your investor.

You’ll be working far closer with them from fund inception to launch, and beyond (for example, rights to invest in fund II) than compared with larger retail funds. Initial private funds for first-time managers are usually family and friends based (but not exclusively) and who will require regular updates and communication on the performance of their new investment. Two other important things: you’ll want to have a keen sense of which geographies you plan to market your fund into because it will help drive the decision about fund jurisdiction and domicile. Also, if you already have a significant investor(s), where are they located and what do they want? And what are their views of the jurisdiction you’re planning to launch your fund in – these are important considerations.

Can you say more about private funds and costs?

Mark Cleary: There are a wide array of private funds and they aren’t homogenous so there is no quick and easy formula on costs. The costs of providing fund administration (and ancillary services) are typically linked to activity and risk. But in Jersey there are some notable areas that can provide some cost savings, for example, it’s not necessary to perform an annual audit on a private fund (albeit some managers deem this as essential) and a Private Placement Memorandum or PPM does not have to be drafted, and both of the aforementioned save some costs. The regulatory application costs incurred is also quite low (relatively) as are the costs for legally registering partnerships or establishing corporate vehicles.

Damien Fitzgerald: My answer is very similar to Mark’s in that there is no simple formula to price a private fund as there is such a wide variety of variables at play. In respect of the essential costs, whilst an audit is required in a Guernsey private fund, it also benefits from not requiring a PPM. Any regulatory application costs and legal establishment costs are also competitive. The initial investment ticket size for investors is lower than Jersey though, at $100k for a qualified investor.
Both Jersey and Guernsey provide flexibility with reduced set up timelines, reduced requirements in demonstrating track record and finally choice of structure for private funds.

Any final thoughts?

Mark Cleary: A shout-out for our sister island, Guernsey. They’ve got a number of specific fund regimes which have an environmental focus, alongside seeking to earn a financial return. So, if any manager wishes to launch a Green or Natural Capital fund outside of the EU, Guernsey has the ability to do this through offering a certified fund product, provided certain parameters are continually met.

Damien Fitzgerald: And both Mark and I would like to do a shout-out for Jersey and Guernsey. Our jurisdictions have literally decades of experience in the fund administration industry, have an excellent track record and enviable brands. All of the skills and expertise needed to fully support a fund throughout its lifecycle are clustered together within a small geographic area. This has led to reinforcing network effects on both Islands. The saying “great things come in small packages” most certainly holds true.
A manager setting up a fund on either Island – particularly with ZEDRA – is going to reap the wider benefits of our ability to administer, manage, govern, and ensure compliance.

You can find the original publication of this article on Citywealth’s website here. Please contact Mark Cleary or Damien Fitzgerald to find out more.