Setting Up A Small Investment Fund: A Beginner's Guide

Setting up a small investment fund is a complex and challenging process that requires careful planning and execution. Here are the key steps to get started:

- Define your business strategy: Determine your investment focus, such as specific sectors or industries you want to target. Differentiate your financial plan from competitors and establish clear goals.

- Create a business plan: Outline cash flow expectations, timelines, and growth strategies. Include a marketing plan to attract future investors and an executive summary.

- Choose a business structure: Decide between a corporation, partnership, or limited liability company (LLC). Each has its own risks and benefits regarding legal requirements, personal liability, and operational flexibility.

- Hire a lawyer: Seek legal expertise to navigate the complex regulatory and compliance landscape. A lawyer will also help with registration, paperwork, and establishing the fund's legal structure.

- Raise capital: Convincing others to invest in your fund is crucial. You may need to contribute your own money and attract accredited investors who meet specific income or net worth thresholds.

- Comply with legal and regulatory requirements: Work with your lawyer to understand and adhere to securities laws, registration requirements, and ongoing responsibilities such as record-keeping and periodic filings.

- Establish operations: Set up your back-office operations, including hiring staff, renting office space, and technology requirements.

- Determine a fee structure: Decide on management fees, carried interest, and hurdle rates. Typically, private equity managers charge an annual management fee of 2% of committed capital.

- Market your fund: Develop a branding and marketing strategy to attract potential investors. You can create informational websites, network with peers and investors, or hire a professional marketing team.

Define your business strategy

The first step in setting up a small investment fund is to outline your business strategy and differentiate your financial plan from your competitors. This requires significant research into a defined market or individual sector. Some funds focus on energy development, while others may focus on early-stage biotech companies. You need to determine the purpose of each investment. For example, is the aim to grow capital for mergers and acquisitions activity, or to allow existing owners to sell their positions in the firm?

Your business strategy should also include whether you will have a geographic focus. Will the fund focus on one region of a country, or will it have a wider scope?

You should also consider the business focus you will adopt. Will your fund aim to improve your portfolio companies' operational or strategic focus, or will this centre on cleaning up their balance sheets?

It is important to remember that private equity typically hinges on investment in companies that are not traded on the public market.

• What is your investment strategy?
• What is your market, industry, or niche?
• How will you find deals?
• How will you raise money for the fund?
• How much will you charge?
• What will your startup costs be?
• What will your ongoing expenses be?

You should also consider the legal structure of your fund. Private funds are often structured as limited partnerships, with a general partner and investors as limited partners. Other legal structures include limited liability companies and corporations.

Finally, you should also consider the type of private fund you want to establish. The two most common types are venture capital funds and private equity funds. Venture capital funds typically invest in startups and other early-stage private companies, while private equity funds invest in growing and later-stage private companies or in public companies that they intend to take private.

Write a business plan

Writing a business plan is a crucial step in setting up a small investment fund. Here is a detailed guide to help you through the process:

Executive Summary

Begin your business plan with an executive summary, which provides an overview of your investment fund. This section should include a brief description of your fund, its purpose, and its key objectives. Clearly state the investment strategy you plan to employ and the target sectors or industries in which you will focus. Outline the competitive advantages that set your fund apart from others, such as any unique approaches or specialized expertise. Additionally, provide a summary of your fund's financial projections, including expected returns and potential risks.

Investment Strategy

This section is the heart of your business plan, where you elaborate on your investment strategy. Define the specific sectors or asset classes you intend to target and explain why these areas present attractive investment opportunities. Discuss the criteria you will use to select investments, such as growth potential, valuation, or industry-specific factors. Be sure to address the level of risk associated with your strategy and how you plan to manage it. If your fund has a particular geographic focus, such as specific regions or countries, be sure to mention it here.

Market Analysis

Conduct a thorough analysis of the market in which your investment fund will operate. Identify your target market, including the types of investors you aim to attract, such as institutional investors or accredited individuals. Assess the competitive landscape by researching other investment funds operating in similar sectors or employing comparable strategies. Analyze their performance, fees, and investor base to identify strengths and weaknesses that can inform your own approach. Discuss any market trends or developments that may impact your fund's performance and explain how you plan to capitalize on them.

Management and Operations

Provide an overview of the fund's management structure and key personnel. Introduce the fund managers, highlighting their experience, track records, and areas of expertise. Discuss the operational aspects of running the fund, including the legal structure you have chosen (e.g., limited partnership or limited liability company). Outline the day-to-day operations, such as investment research, portfolio management, and investor relations. If you plan to outsource certain functions, such as accounting or legal services, mention the external partners or consultants you will be working with.

Financial Projections and Fees

Present the financial projections for your investment fund, including expected returns, cash flow, and expenses. Be transparent about the fees associated with investing in your fund, such as management fees and carried interest. Provide details on the fee structure, explaining how and when these fees will be charged to investors. Discuss any minimum investment requirements and how you plan to distribute profits to investors. Additionally, address the expected timeline for the fund, including the period for raising capital and the anticipated duration of the fund's operations.

Hire a lawyer

Hiring a lawyer is an important step in setting up an investment fund. There are several reasons why you should seek legal advice when establishing your fund, and there are several key questions you should ask your lawyer.

Firstly, a lawyer can help you establish the best business structure for your fund. In the US, for example, investment funds typically assume the structure of a limited partnership or a limited liability firm. As the fund's founder, you will be a general partner with the right to decide on the fund's investments. Your lawyer will be able to advise you on the best structure for your fund, taking into account factors such as the size of the fund, the investment strategy, and the target portfolio entities.

Secondly, a lawyer can guide you through the various compliance requirements and consumer protections that apply to different types of investors. For example, in Australia, retail investors have access to consumer protections that wholesale investors do not. If you plan to have both types of investors in your fund, your lawyer can help you enact strict compliance requirements to ensure your customers always receive the correct information.

Thirdly, a lawyer can advise on the best approach to withdrawal options and the associated timeframes. They can also assist with the complex paperwork involved in setting up your fund, ensuring that you don't make any costly mistakes.

When hiring a lawyer, it is important to obtain legal representation from a specialist in the field of investment funds. Ask prospective lawyers about their experience managing different stakeholders and their interactions with local and/or international regulators. You should also ask for a clear understanding of the costs involved, as legal fees can quickly add up.

In summary, hiring a lawyer is a crucial step when setting up an investment fund. They can provide expert guidance on business structure, compliance requirements, and withdrawal options, as well as handling the necessary paperwork. By seeking experienced legal advice, you can ensure that your fund is established correctly and prepared for the future.

Choose a business name

Choosing a business name is an important step in setting up your small investment fund. Your name should be memorable and reflect your values and investment strategy. It is also important to choose a unique name that is not already in use by another business in your jurisdiction. In the US, you can search your state's Secretary of State's website to check if a name is available. You should also check that the name has not been trademarked by searching the federal trademark registry.

When selecting a name, consider the values you want to promote to potential investors. For example, "Atlas Investing" conveys stability and reliability. You may also want to choose a name that reflects your investment style and strategy. This can be a challenging task, as you will want to select a name that helps to attract investors.

It is also important to think about the legal structure of your business when choosing a name. Investment companies can be structured as corporations, partnerships, or limited liability companies (LLCs). Each structure has its own risks and benefits, so it is essential to carefully consider which one is most suitable for your business.

Raise capital

Raising capital is one of the most challenging steps in setting up an investment fund. Here are some strategies to help you raise capital successfully:

Fund it Yourself

Using your personal savings to fund your startup is the easiest way to raise capital. It demonstrates your confidence in your business idea, which can attract investors or lenders. However, this option comes with financial risks that you should carefully consider.

Business Loan

Small business loans are a common way for entrepreneurs to access capital when launching a new venture. However, loan approval is not guaranteed and usually requires meeting specific criteria, such as having an excellent credit score and being in business for a certain period.

Crowdfunding

Crowdfunding has emerged as a popular capital-raising strategy, thanks to online platforms like Kickstarter, GoFundMe, and Indiegogo. This approach allows you to tap into a large pool of individuals willing to support your venture.

Angel Investment

Angel investors are wealthy, accredited individuals who typically fund businesses alone or join other angel investors. They are similar to venture capitalists but tend to invest in earlier-stage companies. Presenting your business plan and financial projections to an angel investor can be intimidating, so ensure you are well-prepared.

Personal Contacts

Although it may be uncomfortable, don't underestimate the power of your personal network. Friends, family, and acquaintances can be a significant source of capital. According to Fundable, 38% of startup founders raise money through their personal connections, and these investments often exceed $60 billion per year.

Venture Capitalists and Private Equity

Venture capitalists and private equity firms invest in more mature companies. They operate out of a firm and tend to invest larger sums of money compared to angel investors. To attract these investors, you will need a solid track record, a clear and understandable investment strategy, and a skilled team.

Legal and Regulatory Compliance

Before approaching investors, ensure you understand the legal and regulatory requirements, especially if you plan to raise capital in the United States. The SEC has strict compliance standards for private equity fundraising. Consult with a qualified attorney to ensure you are aware of the rules and regulations associated with fundraising, investing, and managing your fund.

Marketing and Pitching

Developing a strong marketing strategy is crucial to attracting investors. Craft a compelling narrative, explain your investment process, and highlight your fund's unique successes. Consider hiring a professional marketing team to help you refine your pitch and reach a wider audience.

Seed Investment Arrangements

Some initial investors may be open to seed investment arrangements, where they receive a discount on fund management fees or partial ownership interest in exchange for a substantial investment in your fund. These investors can also help solicit other investors through their personal networks.

Investment Adviser and Documentation

If your fund has a separate investment adviser, ensure that they are registered with the SEC or the applicable state securities regulator as a registered investment adviser. Additionally, have all the necessary documentation in place, such as an offering document (private placement memorandum) and a subscription agreement for investors.

Compliance with Securities Laws

Understand the regulations around the types of investors you can target and the methods of outreach. Generally, funds that intend to raise money from less sophisticated investors or those without a prior relationship with the sponsor face more hurdles and requirements.

Endowments and Foundations

Endowments and foundations can be a good source of initial investment capital. Eventually, you will need to attract sophisticated investors with larger sums of money, but these initial investors can provide a solid foundation.

Legal Costs

Legal work for raising a fund can be expensive, typically ranging from $50,000 to $300,000 or more. To manage these costs, have a comprehensive fundraising strategy in place before hiring an attorney, including your investment focus, marketing channel, investment strategy, and cost structure.

Remember, raising capital is a challenging but crucial step in establishing your investment fund. By combining these strategies with a well-defined business plan and a unique investment strategy, you'll be well on your way to success.

Frequently asked questions