Contributed by Irwin Latner and Julie Corelli, Pepper Hamilton
Our law firm, Pepper Hamilton, regularly advises prospective private equity and hedge fund managers on the various legal structure options associated with launching a new private investment fund. In our experience, first-time fund managers often have preconceived notions of how their new fund should be structured and what economic and liquidity features, capital commitments, investment horizon and other terms the fund should have. Such preconceived notions, however, frequently evolve based on further exploration of the different fund structure options available and which structures better align with investor interests given the fund’s underlying investment strategy and return objectives. The size and experience of the management team, their strategy and their ability to raise committed capital all play an important role in determining what type of fund structure the manager will deploy.
In this article, we outline a number of private investment fund models, both traditional and nontraditional, that new or emerging fund managers may wish to consider in determining which model is right for their needs and those of their investor base. From deal-by-deal financings (aka independent sponsors), pledge funds, “committed” independent sponsors and single-investor funds to traditional private equity and hedge funds and permanent capital vehicles, there are a number of structure options for a manager to consider and explore. In many cases, emerging managers will be targeting family offices, high-net-worth investors, funds of funds and other investors who are accustomed to emerging-manager investing but reluctant to invest in a traditional committed capital fund with an unproven manager.
In this article:
- Managers seeking to manage outside investor capital should become familiar with the various fund structure models available and consider the model that best fits them and their investor base
- Private investment fund models are constantly evolving as new capital-raising techniques and new types of investment strategies are being developed
- The optimal private investment fund model may differ from manager to manager and may result in a combination of products developed by the same manager for different groups of investors