Launching a private fund is an exciting venture for entrepreneurs. While a successful fundraise, locking down an investment strategy, and sourcing deals are the primary focus of private fund managers, a variety of other to-dos need to be accomplished. From finding office space to selecting service providers to finalizing fund documents, the list can seem daunting, especially for smaller teams. By leveraging service experts and methodically tackling the to-do list, investment management teams can execute an efficient fund launch.
Compliance is top-of-mind for most investment managers in today's highly regulated and ever-changing private funds industry. Read on to learn the nine crucial compliance considerations first-time fund managers should not overlook when launching an investment fund.
1. Form the Best Team: We’re not talking about your internal team; we’re referring to the service providers or experts who will help you launch and operate your firm compliantly and efficiently. Identifying the right service providers can be a lengthy and painful process that many investment managers temporarily put off to focus on tasks they deem to be more critical. This is a detrimental mistake. The right service provider can help develop a robust infrastructure that sets the investment manager up for long-term success. The fund attorney, the fund administrator, the audit and tax provider, the banker, the insurance agent, and the HR provider all play critical roles in a successful launch. Your service providers, particularly the fund administrator, can often recommend reputable service providers, saving you time and connecting you with the best.
2. Draft Rock-Solid Offering Documents: One of the most important first steps when launching a private investment firm is to engage reputable counsel to draft comprehensive offering documents that align with your business and investment strategy. Drafting offering documents can be a very time-consuming task that requires significant back and forth between you and your fund counsel. Ensure you engage counsel well versed in investment fund formation and your particular investment strategy. The documents will become the manual for setting up the fund mechanics and the compliance infrastructure.
3. Understand your Regulatory Obligations: The private fund regulatory landscape is complex, and your compliance obligations will differ depending on several factors, including, but not limited to, your office location(s), business activities, investment strategy, and regulatory assets under management. From the onset, your service provider should be well versed in regulatory investment fund compliance to ensure they devise a practical plan to meet regulatory obligations. For example, several exemptions to Securities and Exchange Commission (SEC) registration need to be considered and analyzed at the beginning stages of launching a private investment management company so that you understand your complete regulatory and compliance obligations.
4. Start the SEC Registration Process Early: If you do not qualify for an exemption from SEC registration, you will likely need to become a registered investment adviser. This can be a lengthy process involving drafting detailed regulatory filings that must closely align with your offering documents and compliance program. Therefore, once you receive the draft offering documents from counsel, it is time to begin preparing for investment adviser registration. As a best practice, give yourself enough time to complete this process, including factoring in the 45 days the SEC has to review and approve your registration request. It is more important to do it right rather than rush and get off on the wrong foot with the SEC.
5. Institute a Robust Compliance Program: The registration process is more than submitting regulatory filings to the SEC. New registered investment advisers must develop a compliance program that includes comprehensive policies, procedures, and controls that align with their business activities while complying with their regulatory obligations. Gone are the days when you could purchase an off-the-shelf set of policies and procedures. The SEC expects investment managers to develop customized policies and procedures that align with their specific business model and registration status. Once you have developed a Compliance Manual and Code of Ethics that suits your firm, you must keep up with the ever-changing regulatory landscape to ensure you are prepared and compliant.
6. Instill a Culture of Compliance: Establishing a strong culture of compliance from the start is extremely important in a highly regulated industry. Developing a comprehensive compliance training program is critical to ensuring employees are aware of and are adhering to regulatory obligations and internal policies and procedures. The training program should highlight key risk areas based on SEC priorities, regulatory obligations, and the firm's business activities. Laying out the most important policies and procedures in a condensed format helps create a strong culture of compliance.
7. First Impressions Matter, Especially to Investors: The fundraising process is one of the most critical components of a successful fund launch. Institutional quality marketing materials are essential to setting your firm apart from the rest. Investors are accustomed to marketing materials that comply with the SEC's marketing rule, which means presenting information in a transparent, accurate, and well-balanced manner. Your counsel or compliance partner should review the marketing presentation before you go to market to ensure it meets SEC requirements. This is especially relevant today, as the SEC made significant changes to its marketing rule, which must be complied with by November 4, 2022.
8. Leverage Experts: Regardless of the industry, the costs associated with starting a new business can be significant. In the private funds industry, there are proven methods to reduce costs while operating a successful, efficient, and compliant business. One way is to initially forgo hiring full-time employees and instead engage experienced third-party consultants, accountants, administrators, and counsel. These service providers come at a fraction of the cost of full-time employees and provide access to an abundance of resources not always available when hiring a single person. As your firm and assets under management grow, there will likely come a time when it is prudent to hire a full-time Chief Compliance Officer (CCO), Chief Financial Officer (CFO), counsel, etc. However, initially leveraging a team of experts can help reduce costs while providing additional resources and perspective.
9. Your Job is Never Done: After you finally get through all the tasks associated with launching a private investment firm, your work is not finished. A successful investment manager needs to periodically assess firm risks. Staying abreast of regulatory and accounting changes and ensuring you provide effective training to staff is essential to your business’s success.
“If success were easy, everyone would do it.”
The words of John Hawkins ring true when launching a private investment firm. Leveraging experts from the start will save you time and prevent you from making costly mistakes. Lean on your team of experts to draft rock-solid offering documents and a compliance infrastructure that will keep you on the right side of regulatory change.
