MAKING OF A FUND
Bridging the Funding Gap
The making of Investments Funds
Non-Regulated Funds
Non-Regulated Funds are not subject to oversight by a regulatory body. However, the Fund Manager must be authorized and regulated.
Non-Regulated Funds have few restrictions on the type or volume of investment that the fund manager can make.
Typically, Non-Regulated Funds can be established for Venture Capital, Private Equity or Property Development Investments.
What is an Investment Fund?
Regulated Funds
These are Investment Funds that are regulated by a regulatory body.
Regulated Funds normally have restrictions on the type and volume of investment that the fund manager can make.
Typically, Regulated Funds may only invest in listed securities and no more that 5% of the fund may be invested in a single security.
Non-Regulated Funds
Non-Regulated Funds are not subject to oversight by a regulatory body. However, the fund manager must be authorized and regulated.
Non-Regulated Funds have few restrictions on the type or volume of investment that the fund manager can make.
Legal Structure of Funds
Regulated Funds
This type of funds are typically created as Investment Companies or Unit Trust Companies . In either case, a regulated fund is classified as a collective investment scheme.
A Regulated Fund is controlled and managed by an authorized and regulated fund manager.
A Regulated Fund can, theoretically have an unlimited number of investors.
Non-Regulated Funds
This type of Funds are typically created as Capital Partnerships under which contributing investors become limited partners of a limited liability partnership.
The partnership is controlled by a General Partner who carries the responsibility of adding value to the partnership and is responsible for all liabilities of the partnership. The partnership will appoint a fund manager to provide oversight and investor reporting functions. A Capital Partnership has restrictions on the number of Investors.
Special Purpose Vehicle
SPV’s are essentially the same as Non-Regulated funds, but are usually threated differently for tax purposes.
SPV’s are normally established for a very specific purpose.
SPV’s can become Limited Partners in a Capital Partnership and can also participated in Regulated Funds.
Fund Ownership
All funds are owned by the investors who invest in the funds, but the investors do not have any managerial control over the funds or their ultimate use. Management of funds is the responsibility of the fund manager and general partner, where one exists.
Parties to the Fund Structure
Investors
Are the people who provide money or capital investments to funds. Investors are, generally, professional or sophisticated investors. Investors place their money into a fund on the basis of a Private Placement Memorandum – a legal document that sets out the purpose and investment criteria of the fund, its projected returns and full disclosure of the parties involved in the management of the fund.
The Fund Manager
The Fund Manager serves the investors by ensuring that investments made are in accordance with the investment criteria and purpose of the fund.
The Fund Manager has a legal responsibility to accurately report all investments to investors, as well as provide periodic audited reports on the status and profits/losses realized from investments.
The Fund Manager is paid by the investors for his/her services and is answerable only to investors.
The General Partner
Under a Capital Partnership Structure, the General Partner is the person or company that adds value to the underlying investments.
General Partners will normally select and monitor investments in conjunction with the Fund Manager.
The General Partner has a responsibility to the Limited Liability Partners, but may also interact more closely with the underlying investments.
General Partners are paid by the Capital Partnership based on results.
Putting in Together
Venture Capital Structure
For the purpose of this presentation, we shall no longer reference regulated funds, as their scope as venture capital vehicle is restricted. Therefore, we shall concentrate on creating venture capital pools that may be utilized to invest in a wide variety of commercial projects.
The Traditional Approach
The simplest structure for a Venture Capital Pool would be a simple Capital Partnership that could invest in a wide range of industry sectors.
Problem 1: Investors may not wish to participate in some of the chosen sectors.
Problem 2: The number of investors is limited (about 20).
A More Sensible Solution
Create a series of SPV’s – one SPV per industry Sector.
Each SPV would become a Limited Partner in a main Capital Partnership.
Investors can make capital commitments to one, some or all SPV’s.
This increases the number of possible investors as each SPV can have up to 20 investors and the Capital Partnership can have up to 20 SPV’s as Capital Partners.
How the Numbers Stack-Up
Each SPV can attract up to 20 investors per SPV. The Capital Partnership can have up to 20 SPV’s as Capital Partners, thereby increasing the maximum investor base from 20 to a maximum of 400. If each investor was committing €50 million, the Capital Partnership would have a total potential fund size of €20.000.000.000.
Why Investors Like Funds
Investing in a Fund or one or more of its SPV’s enables investors to spread risks.
The return on investments are generally superior to those realized through regulated funds.
The investments world is currently awash with money with nowhere safe to deposit, therefore, investments funds are becoming the first choice over traditional bank deposits.
Who are Fund Investors?
Ultra-high net worth individuals.
Institutional investors, including other investment funds, investment companies, unit trusts, pension funds and insurance companies.
Who can Establish a Fund?
Essentially, anyone.
Regulated Funds are normally established by Fund Manager only. They have a vested interest in using their expertise in growing investments through the trading of listed securities.
Non-Regulated funds can be established by anyone who wishes to create a capital pool through which to finance specific commercial projects or create a more general venture capital pool.
Typical organizations are Venture Capital Firms, Development Corporations, Regional Governments, Private Equity and Project Syndicates.
Establishing Your Own Fund
Advantages
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Ability to raise funds for specific projects or industry sectors.
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Consolidate several smaller financing requirements into a larger fund structure.
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Attract large-scale investment from institutional and sophisticated investors.
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Expand the Fund structure as needs arise in the future.
Typical Candidates
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Regional Development Corporations
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Business Consortia
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Venture Capital Companies
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Individual Corporations with large-scale project funding investments
Creating a Private Fund
Creating a Fund or SPV is a legal process involving professional Service advisors.
These includes:
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An international Law Firm specializing in the Financial Markets.
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An international Audit Firm.
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A Regulated Fund Manager.
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A Fund Advisory Firm.
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A General Partner to provide investment assessment, structuring, oversight and added value.
What Do These Advisors Do?
Essentially, they provide “Due Diligence”. They undertake all the research of the parties involved in the Fund or SPV and provide assurance that the Fund will be operated functionally.
They also prepare the general fund of SPV Private Placement Memorandum and associated agreements in accordance with specific regulations.
Finally, they register the legal entity with the relevant authorities in the chosen Fund jurisdiction.
Why Are Professional Needed?
Without sound professional backing, a Fund of SPV will not be able to raise capital commitments.
The amount of money involved demands absolute professional presentation and backing in order to instill Investors confidence.
Who Pays the Costs?
The Sponsor of the Fund or SPV.
The Sponsor is normally the organization or corporation who stands to benefit from the Fund or SPV.
In many cases, sponsorship is a joint arrangement between the beneficiary organization and the General Partner, or Fund Manager, in which case the costs are shared.
What Are the Sponsor’s Financial Benefit?
If the Sponsor is a corporation that will directly receive the investment, the benefit is clear and obvious.
If the Sponsor is a organization that intends to finance a number of different projects as a Venture Capitalist, Development Corporation or Business Consortium, then the Sponsor can share in the Carried interest earned by the General Partner of the Fund or SPV. Carried Interest is normally 20% of the Fund profits upon exit from the investments.
Feel free to contact CPMLAW Firm for any further information. We will be pleased to assist you and answer all your inquiries.
