By Mike Capraro, Client Director at ZEDRA Jersey
The world of investment funds is complicated. It is therefore essential to talk to an experienced funds professional that can guide you on all aspects of establishing a fund.
Typically, the professional counterparties involved in a fund formation include fund lawyers, tax advisers, administrators, custodians and auditors.
So who is best placed to talk to in the first instance. That can be a debatable point, but it would make sense to speak to an experienced fund administrator initially. The fund administrator is normally the pivotal point around which the fund formation and ongoing administration revolves. Fund administrators are well placed to discuss significant initial considerations with the fund promoter, such as:
- Type of investors to whom the fund will be targeted; retail, high net worth, institutional or professional;
- Should the fund be regulated or unregulated? There are numerous considerations here that will determine the outcome;
- Is it really a fund or can it be established as a simple investment company?
- Type of legal entity to be established; corporate, partnership or trust;
- Distribution regulations i.e. the EU Alternative Investment Fund Managers Directive (AIFMD), fund licencing and registration requirements in certain countries;
- Appropriate jurisdictions to consider e.g. onshore, offshore;
- Operational considerations: asset class, valuation and dealing frequency, pricing sources, systems considerations, to name a few;
- Compliance and KYC considerations; where are the investors coming from, risk considerations related to source of funds, asset class and target investments;
- Viability considerations: the minimum asset size, the fixed and variable costs to operate a fund;
- Set-up and launch timing;
- Website and marketing material disclosures and disclaimers;
The above is not an exhaustive list but serves as a good starting point. As part of the process other advisers will need to be engaged to provide expert advice, such as tax, legal and audit.
There will be key considerations which determine whether the project has traction or not. For example, it is essential very early on to establish whether the fund promoter has sufficient interest from potential investors to meet the minimum financial requirements to ensure a successful launch. Without this, the project is potentially destined to fail. If investors have been lined up, are they willing to provide information to pass the requisite anti-money laundering checks, such as source of funds and source of wealth questions? Will they pass stringent customer due diligence checks? If not, then they are of no consequence to a fund in any reputable regulated jurisdiction.
It is equally important to determine whether the asset class and target investments will pass muster in a regulated environment. The OECD publishes countries and asset types that are off limits, as well as people that are sanctioned. All fund jurisdictions around the world adopt these OECD directives.
Operational considerations are also sometimes the cause of derailment. For example, trying to a fit an illiquid asset class, such as property or private equity, into an open-ended fund structure will invariably not work.
Compliance and due diligence on the investment manager/fund promoter is a material consideration for the fund administrator and all fund counterparties. Ordinarily, only experienced, well-resourced and untainted investment firms are considered. The counterparties to a fund are acutely aware of the financial and reputational risks involved in providing services to a fund and will consequently be looking at every aspect thereof. Full disclosure with matching evidence is the order of the day.
When selecting fund counterparties, the fund promoter should be prepared to do its own due diligence and “kick the tyres” wherever possible. For example, systems considerations at the administrator and custodian level are key to ensuring a smooth operational experience for all concerned, none more so than for the investors in the fund.
To conclude; there are countless examples of failed funds, costing the fund promotor wasted time and money. Engaging with an experienced project coordinator can go a long way to mitigating the risk of failure and the associated financial expense.