Launching An Investment Fund: Training For Beginners

Investing is a great way to grow your wealth, but it can be a tricky business to get into. There are many online courses and guides available to help you learn the basics of investing and how to start an investment fund. These courses will cover topics such as setting clear investment goals, determining how much you can invest, understanding your risk tolerance, choosing the right type of investment account, and learning how to monitor and review your investments. In addition to online courses, you can also find many books and other resources that can provide valuable information and tips on investing. It is important to do your research and understand the risks involved before diving into the world of investing.

Define the business strategy

To define the business strategy for an investment fund, you must first outline your business strategy and differentiate your financial plan from those of competitors and benchmarks. 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.

As you articulate your investment strategy, consider the following:

• Will the fund have a geographic focus? If so, will it focus on one region of a country, or will it have an international scope?
• Will the fund emphasise a specific strategy in similar emerging markets?
• Will your fund aim to improve portfolio companies' operational or strategic focus, or will this centre on cleaning up their balance sheets?

Remember, private equity typically hinges on investment in companies that are not traded on the public market. It's critical 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?

Create a business plan

Creating a business plan is an essential step in starting an investment fund. It serves as a roadmap for your business, outlining its key elements and helping you secure funding from investors. Here are the steps to create a comprehensive business plan:

Executive Summary

Provide an overview of your business, including your mission statement, products or services, and basic information about your company's leadership team, employees, and location. This section should also include financial information and high-level growth plans, especially if you intend to request financing.

Company Description

Go into detail about the problems your business aims to solve and the consumers, organizations, or businesses your company plans to serve. Be specific about the competitive advantages that will make your business a success, such as experts on your team or a prime location for your store.

Industry and Market Analysis

Conduct competitive research to understand your industry outlook and target market. Identify trends and successful strategies employed by your competitors. This analysis will help you determine how your business can differentiate itself and succeed in the market.

Organization and Management

Describe the legal structure of your business, such as whether it will be a corporation, partnership, or sole proprietorship. Create an organizational chart outlining the roles and responsibilities of key personnel. Include resumes and CVs of your management team to showcase their expertise and experience.

Service or Product Line

Explain the products or services you offer, highlighting their benefits to customers and their lifecycles. Share your plans for intellectual property, such as copyright or patent filings. If you are engaged in research and development, provide a detailed explanation.

Marketing and Sales Strategy

Describe your marketing and sales strategies, including how you plan to attract and retain customers. Outline your funding requirements and how you intend to use the funds. Be specific about the amount of funding needed, the terms you seek, and the length of your funding request.

Financial Projections

Provide financial projections to demonstrate the stability and growth potential of your business. Include income statements, balance sheets, and cash flow statements for the past three to five years if your business is already established. For new businesses, provide forecasted income statements, balance sheets, cash flow projections, and capital expenditure budgets for the next five years.

Remember, your business plan should be tailored to your specific needs and goals. It should reflect your understanding of the market, your target audience, and your financial projections. This comprehensive document will not only guide your business decisions but also help convince investors that your venture is worth investing in.

Establish the investment vehicle

The next step in setting up an investment fund is to establish the fund's legal structure. This will depend on the jurisdiction in which the fund is being set up. In the U.S., for example, a fund typically assumes the structure of a limited partnership or a limited liability firm. As the founder of the fund, you will be a general partner, meaning that you will have the right to decide which investments compose the fund. Your investors, on the other hand, will be limited partners, who do not have the same decision-making rights as you and are only accountable for losses tied to their individual investments.

Your lawyer will be responsible for drafting a private placement memorandum and any other operating agreements such as a limited partnership agreement or articles of association.

It is also important to establish compliance, risk and valuation guidelines for the fund. You will also need to have an offering memorandum, subscription agreement, partnership terms, custodial agreement, and due diligence questionnaires prepared. Marketing material will also be needed prior to the process of raising capital.

At this stage, it is also crucial to determine a fee structure. Typically, private equity managers receive an annual management fee of 2% of committed capital from investors. Carried interest is usually set at 20% above an expected return level. During this stage, it is also important to establish compliance, risk and valuation guidelines for the fund.

Determine a fee structure

Determining a fee structure is a critical aspect of starting an investment fund. The fee structure will depend on various factors, including the type of fund, the fund's strategy and size, and investor preferences. Here are some key considerations for determining the fee structure:

Management Fee

The management fee is typically charged as an annual percentage fee based on the total assets under management (AUM). This fee covers the fund's operating expenses, such as salaries, office space, technology, and compliance costs. The management fee usually ranges from 1% to 2% of AUM, with larger funds often charging lower fees due to economies of scale. When setting the management fee, it is essential to consider factors such as the average fees charged by similar funds, projected expenses, and target profit margins.

Performance Fee

The performance fee, also known as an incentive fee, is charged as a percentage of the fund's positive returns or profits. It is designed to align the interests of the fund manager with those of the investors by rewarding the manager for generating high returns. The performance fee typically ranges from 15% to 20% of the fund's profits and may be subject to a high-water mark, which means the manager only receives the fee if the fund's value exceeds its previous highest level. When determining the performance fee, it is essential to consider factors such as the average performance fees charged by peer funds and investor preferences, such as hurdle rates and clawback provisions.

Negotiating Fees

In some cases, particularly for new fund managers, fees may be negotiated to induce seed investors during the fund formation stage. It is essential to carefully evaluate the competitive market for investors and management goals when determining the fee structure.

Regulatory and Compliance Considerations

Fund managers must adhere to standard fee and expense disclosure rules under relevant regulations. This includes clearly documenting fee terms and ensuring that marketing claims accurately represent performance and fees.

Fee Trends

It is important to stay informed about fee trends in the industry. For example, there has been a shift towards reduced rates, added performance incentives, and increased transparency in recent years. Emerging managers should carefully evaluate fee trends, statutory compliance, and investor preferences when structuring their fees.

Raise capital

Raising capital is one of the most challenging steps in starting an investment fund. Fund managers will be expected to contribute 1% to 3% of the fund's capital. Here are some ways to raise capital:

Debt Financing

Debt financing, also known as debt raising, is when a company borrows money and agrees to pay it back later. This is often in the form of a loan, but it can also take the form of selling corporate "bonds" to investors, which mature after a certain date. Before they mature, the company must pay interest on the bonds to the investors.

Equity Financing

Equity financing is when a company raises capital by selling shares of company stock. These can be common shares or preferred shares. The main downside of equity financing is that the company is effectively selling off pieces of business ownership.

Fund It Yourself

Dipping into your personal savings may not sound ideal, but it is probably the easiest way to raise capital for a startup. The fact that you have enough confidence in your business to invest in it can make investors or lenders more likely to commit funding.

Business Loan

Small business loans are a major stepping stone for many entrepreneurs launching a new business. However, loan approval is not guaranteed. You will need to meet specific requirements, such as having an excellent credit score and being in business for a certain period.

Crowdfunding

Thanks to the internet, crowdfunding is a popular capital-raising strategy. Websites like Kickstarter, GoFundMe, and Indiegogo are some of the best-known crowdfunding sites.

Angel Investment

Angel investors are wealthy, accredited individuals who usually fund businesses alone but sometimes join other angel investors. Make sure you have a solid business plan and pitch ready, with all the key financial information at your fingertips.

Personal Contacts

Asking friends and family for money may be uncomfortable, but friends and family invest the most—more than $60 billion per year. However, mixing family and business may add more stress to the capital-raising process than necessary.

Venture Capitalists

Venture capitalists tend to invest in more mature companies than angel investors, and they operate out of a firm. They invest in a lower ratio of businesses that apply for funding but generally invest more money when they do.

Private Equity

Private equity fundraising is when private equity firms buy shares in companies on behalf of institutional and accredited investors. It is capital invested in a private company, while venture capital is funding given to startups or other young businesses that show potential for long-term growth.

Frequently asked questions