Private investment funds are investment vehicles that are used to pool together capital from a group of investors in order to invest in a portfolio of assets (or even a single asset). These funds can take many different forms, including hedge funds, private equity funds, real estate funds, and venture capital funds, and they are typically structured as limited partnerships or limited liability companies.
Forming a private investment fund typically involves the following steps:
- Identifying the purpose and strategy of the fund: Before setting up a private investment fund, it is important to determine the fund's investment strategy and goals. This will help determine the types of investors that the fund will target, as well as the types of assets that the fund will invest in. Additionally, the fund structure is determined, taking into account the investment strategy and goals and the types of investors expected to invest in the fund.
- Drafting the fund's governing documents: The fund's governing documents, which may include a private placement memorandum, limited partnership agreement or operating agreement, and subscription agreement will outline the rights and responsibilities of the fund's managers and investors, as well as the fund's investment objectives and strategies.
- Making regulatory filings: Depending on the jurisdiction in which the fund is located and the types of assets it will invest in, and the exemptions relied upon under the Securities Act and applicable state statutes (such as Regulation D or Reg S), the fund may need to make certain securities filings with the Securities and Exchange Commission (SEC). Additionally, the fund’s manager may need to register with the Financial Industry Regulatory Authority (FINRA) or the CFTC (and possibly other regulatory bodies).
- Raising capital: Once the fund’s governing documents have been finalized, the fund's managers will begin the process of raising capital from investors. This typically involves conducting due diligence on potential investors, negotiating the terms of the investment, and closing the investment.
Once a private investment fund has been formed, it must operate in accordance with its governing documents and any applicable laws and regulations. This may involve:
- Managing the fund's portfolio: The fund's managers are responsible for making investment decisions on behalf of the fund, which may include buying and selling securities, entering into derivatives contracts, and taking other actions to achieve the fund's investment objectives.
- Reporting to investors: Private investment funds are typically required to provide regular reports to their investors, which may include financial statements, portfolio valuations, and other information.
- Making Distributions: Private investment funds either make period distributions (or allow for withdrawals of capital) or a single distribution at liquidation.
- Complying with regulatory requirements: Private investment funds are subject to a variety of regulatory requirements, including those related to disclosure, valuation, and conflicts of interest. It is important for the fund's managers to ensure that the fund is in compliance with these requirements. Fund managers may also have ongoing regulatory requirements, such as maintaining and updating their Form ADV (for registered investment advisers and exempt reporting advisers).
When a private investment fund is ready to wind down or "exit," it must take steps to distribute its assets to its investors and dissolve the fund. This process may involve:
- Liquidating the fund's assets: The fund's managers may need to sell off the fund's portfolio holdings in an orderly manner in order to generate cash for distribution to investors.
- Distributing the fund's assets to investors: Once the fund's assets have been liquidated, the proceeds must be distributed to the investors according to the terms of the fund's governing documents.
- Dissolving the fund: Once all of the fund's assets have been distributed to investors, the fund must be formally dissolved, which typically involves filing paperwork with the appropriate regulatory authorities.
Private investment funds can be complex and sophisticated vehicles, and they are subject to a variety of legal and regulatory requirements. As a result, it is important for fund managers and investors to seek the advice of experienced legal counsel when forming, operating, and exiting a private investment fund. Contact us today to schedule a consultation.