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Setting Up a New Fund: How to Avoid Problems That Will Stop You in Your Tracks

06 July 2022

The road to setting up a new fund is paved with challenges, especially for first-time fund managers without a proven track record. The process is generally more complex, expensive, and time-consuming than expected. 

 

This article will explore the top challenges that new fund managers should be aware of, and how to overcome them.

Challenge #1: Selecting service providers

The most important selections are your fund administrator, bank, legal counsel, and payroll/benefits administrator. Engage with these service providers—and a fund administrator in particular—about six to twelve months ahead of your first close. 

 

What to look for in a service provider:

  • Ownership: Mergers and acquisitions among fund administrators are common, so pay attention to ownership, which can dictate a provider’s approach.
  • Skills & experience: Look for firms staffed by experienced professionals with depth of experience and the willingness to be accessible to emerging managers. Don’t limit these considerations to the staff, consider the resource pool of the jurisdiction as a whole. 
  • Turnover: Consistency in staffing is key for smooth fund operations, so look for firms with low turnover and a uniform experience.
  • Systems: Cybersecurity, BCP arrangements, and other systems and controls should also rank on your provider checklist. Sophisticated software can provide reporting and metrics that help deepen your understanding of your portfolio.

Professional, experienced service providers have another benefit: they help reassure LPs, who want to see that a new fund is able to manage the practical side of fund management. 

 

Challenge #2: Regulatory requirements

 

Regulatory and compliance considerations loom large for first-time fund managers. On top of the unpleasant consequences of a misstep, regulations are complex and ever-changing.

 

Despite the complexity, fund managers must be aware of how compliance law applies to their fund. Some fund administrators have well-established processes for investor onboarding, including AML/KYC, a common stumbling block for funds hoping to pass an audit. 

 

Of course, the extent of compliance law will depend on jurisdiction. Selecting the right jurisdiction for your fund is not necessarily a simple task with an obvious answer. 

 

Here are a few factors to consider when selecting the right jurisdiction:

 

  • Regulatory approach: How easy will it be to conduct business, and what regulated activities will you need to be mindful of? Requirements vary wildly between popular jurisdictions, so consider where you plan to raise capital and in which jurisdictions you’ll invest.
  • Turnaround time: Some regulators are notoriously slow or working their way through a large backlog with limited staff. Educate yourself from the outset on the approximate turnaround time of your regulatory environment.
  • Range: Finally, consider the range of fund products offered and how well they meet the stated needs of the fund.

Challenge #3: Cost vs value

Cost does not always intimate value. We know this intellectually, but it’s tempting to forget that lesson when setting up a new fund. Keep in mind that a product or service provider priced competitively against the competition will not necessarily cost less in the long run.

 

Select products and service providers based on their level of compatibility with your fund and your long-term strategy. Any products you choose should suit the requirements of your investors and the mandate of the fund, with appropriate costing.

Challenge #4: Taxes

 

The right tax and structuring advice is critical for a fund that is efficient and well-run over the long haul. Taxation of elements like carried interest, for instance, can be complex. Some jurisdictions (like the UK) have implemented tax regimes that impose charges on fund returns that fall outside the definition—and that’s just one taxable item.

 

Among the other factors to consider are:

 

  • Structuring and legal form of the fund
  • Valuation
  • Asset class
  • Investor demographics
  • Jurisdictional exposure of the investments

 

At Fairway Group, our extensive expertise has given us a deep understanding of the complexities encountered by new and emerging funds. Our highly qualified team ensures that we provide a proactive, director-led service to all clients, irrespective of fund size. 

Our suite of fund administration services includes director, company secretarial, compliance, accounting, and investor reporting. Contact us today to learn more.

 

Aslam Shareef, Director and Head of Funds