Avoid the pitfalls of under-predicting expenses & over-predicting raising capital
Launching and running a hedge fund is a huge responsibility for any investment manager, requiring a significant amount of oversight for their investors. Making the right strategic decisions upfront is an essential component to a fund manager’s future success. Addressing the major decisions to be made:
- What is the appropriate business plan?
- Do we have the right strategy, structure and jurisdiction?
- How will we raise capital?
- Do we have the resources and technology needed to be scalable?
- How do we eliminate unforeseen expenses?
Fund managers can get into trouble by having an overly optimistic view. Under-predicting expenses and over-predicting raising capital is the common pitfall, so always take the conservative approach. Based upon the complexity of the investments, expenses may vary from 35K to 100K USD (€27K – €81K) and usually include legal cost, audit and tax and fund administration. Budgets should reflect whether the investors or the investment manager bear the burden. In all cases, creating a methodical business plan – from pre-launch through the fund lifecycle – will help eliminate a significant amount of unforeseen expenses, involve regulatory requirements and tackle investor concerns.
For most emerging managers, the first year running cost are their primary concern along with raising capital. So opt for a cost-effective ramp up solution as your fund scales. Other factors to consider:
- Timely and accurate reporting to meet your investor needs;
- Connect with local offices;
- The appropriate technology for your strategy;
- Streamlined execution.
Creating the appropriate structure will be based upon your investment strategy and location of your investors. The most common structure in the US for emerging managers is a Delaware Limited Partnership. These structures are:
- commonly formed;
- open ended (not limited to the number of US investors);
- non-regulated by the security and exchange committee (SEC);
- cost effective.
Private equity funds are closed-ended (limiting the number of investors), have a typical life span of seven to ten years and are generally more complex than a typical open-ended fund. A significant amount of planning is needed to predict running costs and investment duration throughout the fund lifecycle. These are generally disclosed in the funds formation documents. Raising enough capital is always a key driver, as well as limitation of startup, management and personal expenses.
To successfully grow your fund, you need to have formulated an appropriate business plan and you should have a personal stake in the fund (the ‘Skin in the Game’): why would an investor invest, if you won’t? One of the mistakes emerging managers make is trying to raise capital before drafting their legal documents. This could give the impression that you are not serious about your fund. Most start-up funds raise initial capital from friends and family to develop a track-record, while others focus on institutional and high net worth investors. Considering the right sector, appropriate fees and the right business partner can dramatically improve your results.
When selecting the right business partner:
- Always consider a firm with a longstanding presence across the globe;
- Find proven expertise, resources and knowledge to stay informed and involved on the appropriate jurisdiction and compliant structures;
- Limit expenses and position yourself in the best possible light to raise capital;
- Check for the option of turnkey solutions if you need them; it helps streamline funds to market while reducing costs;
- Cutting edge technology is a critical component in successful fund administration and corporate services. We advise to select and invest in top class technology.
Just ask yourself: will you be the big fish in a small pond, or a small fish in a big pond? It is extremely important to align yourself with partners that are large enough to provide a comprehensive and seamless service level, yet small enough to offer you partnership and dedication needed. Choose service providers who have your best interest in mind and truly act as an extension of your business. Regardless of your fund size and scope.
Need to know more? The Bolder Group (formerly Circle Partners and AMS Financial) has been working with emerging and established fund manager since the year 2000, playing an essential role in fund structuring, ongoing corporate and legal support, fund accounting and administrations services, register and transfer agency services, financial, regulatory and tax reporting services. We create partnerships with clients and create a customized solution to fit individual needs.