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Stage 2 of 6

Fund structure and documents

Most US private funds are built from the same few parts. Fund counsel puts them together for your strategy and your investors; knowing the parts makes their questions, and their bill, easier to follow.

Typical time: Commonly two to four months for the documents, often run alongside early fundraising.

The usual parts

The fund: very often a Delaware limited partnership. Investors are its limited partners. It holds the investments.

The general partner: a separate entity, usually owned by the team, that controls the fund and receives the carried interest.

The management company: the team’s firm. It employs the people, is paid the management fee and is the investment adviser for securities law purposes.

Depending on the investors, counsel may add a parallel fund or a feeder fund (often for non-US or tax-exempt investors), a blocker corporation, or vehicles for co-investment.

The documents

The limited partnership agreement (LPA) sets the terms: the size, the investment period and term, the fees, the waterfall and carried interest, the GP commitment, key-person and removal provisions, the advisory committee, and how the fund reports to investors.

The private placement memorandum (PPM) describes the strategy, the team, the track record, the terms and the risks. The subscription documents are what each investor signs to commit, with the questions that establish they are eligible to invest. Side letters record terms agreed with one investor.

Securities and adviser rules to plan for

Private funds in the US are usually offered under Regulation D, which limits who may invest and how the fund may be marketed; Rule 506(b) and Rule 506(c) differ mainly on general solicitation. The fund also needs an exemption from registering as an investment company, commonly section 3(c)(1) (a limit on the number of investors) or section 3(c)(7) (investors who are qualified purchasers).

The management company may need to register with the SEC or a state as an investment adviser, or may qualify as an exempt reporting adviser, for example as an adviser solely to venture capital funds or to private funds below an asset threshold. Which applies depends on the strategy, the assets and where the team is. This is a question for counsel.

Checklist: structure and documents

  • Hire fund counselAgree the scope and the fee, including what is deferred to first close.
  • Choose the structureFund, general partner, management company, and any parallel or feeder funds.
  • Settle the key termsSize and hard cap, fees, carry and waterfall, GP commitment, term, key person.
  • Form the entitiesFile formation documents; get tax ID numbers for each entity.
  • Draft the LPA, PPM and subscription documentsCounsel drafts; the team checks every fact about itself.
  • Decide the offering exemptionRule 506(b) or 506(c), and 3(c)(1) or 3(c)(7).
  • Settle the adviser statusRegistered, state-registered or exempt reporting, and what each needs filed.
  • Plan the tax structure with your tax adviserBlockers or feeders for tax-exempt and non-US investors, the carry, the management company.

Terms worth knowing: LPA, PPM, Limited partner, General partner, Distribution waterfall, Hurdle rate, Key person, Side letter, Feeder fund, Parallel fund, Blocker, Rule 506(b), Rule 506(c), Hard cap.

Talk to someone who has done it

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This guide explains how fund launches commonly work. It is not legal, tax or investment advice: rules differ by fund, investor and place, and change. Speak to your own lawyers and tax advisers before you act.