Who Do You Need on Your Team?

Now that you understand the basics of getting paid, it’s time to learn who you’ll need on your team to make your investment-management business successful. Even “solo GPs” need most (or all) of the team members described below. You can’t do it alone! But first, let’s discuss how you’re going to pay for all this.

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FUND EXPENSES — FEES AND EXPENSES PAYABLE BY FUNDS AND SYNDICATIONS

Investment-fund documents typically contain a definition of “fund expenses,” which are costs payable by the fund itself (i.e., the capital contributions of the LPs and the GP). In practice, fund expenses are paid by the fund’s bank account or credit card. In other words, fund expenses are not usually paid by the ManCo or the GP.

EXPENSES THAT ARE NOT FUND EXPENSES (PAID USING THE MANAGEMENT FEE)

In general, the salaries of GP/ManCo personnel (including the principals and any other employees) are not fund expenses. Instead, these salaries are paid using the management fee (discussed in Chapter 2).

Other GP/ManCo expenses that are not typically fund expenses include:

• GP/ManCo offices
• GP/ManCo equipment, hardware, and software
• GP/ManCo-level accounting and tax returns

Often, the definition of “fund expenses” is negotiated. Depending on the bargaining power of the GP and the LPs, certain expenses may or may not be considered fund expenses, including:

• GP/ManCo regulatory costs (such as filing Form ADV)
• Fees to attend industry conferences
• Payments to placement agents for raising money
• Costs associated with certain types of litigation
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EXPENSES THAT ARE FUND EXPENSES (PAID USING FUND CAPITAL CONTRIBUTIONS)

As a general rule, fund-related expenses paid to third-party service providers are fund expenses. So, if you hire a third party to provide one of the services discussed in the next section (Key Team Members for Investment Funds and Syndications), the fund typically pays for it outside (in addition to) the management fee.

Other examples of fund expenses include:

• Entity-formation and registered-agent fees
• Blue Sky filing fees and other fund-related regulatory costs
• Diligence costs
• Travel expenses to find investments
• Payments for fund-level accounting and tax-return preparation
• Indemnification costs

REIMBURSING THE GP PRINCIPALS FOR FUND EXPENSES

Most fund documents permit the GP principals to be reimbursed by the fund for anything that’s a proper fund expense. Reimbursement is particularly helpful for costs incurred before the fund’s initial closing. For example, if the principals paid the fund-setup costs out of pocket, the fund would reimburse them at the fund’s initial closing.

Some service providers (such as registered agents, lawyers, and administrators) might defer a portion of their fees until the fund’s initial closing, which can help emerging managers with liquidity.

Now that we understand how fund expenses work, let’s discuss who you need on your team.

KEY TEAM MEMBERS FOR INVESTMENT FUNDS AND SYNDICATIONS

Below are some key people you’ll need on your team. Some are absolutely required, and others are optional. When interviewing potential candidates, consider asking about their cost structure, staffing model, and experience with private investment funds (very important). Ask friends for referrals.

INVESTMENT ANALYST (REQUIRED)

Investment funds and syndications need someone who can provide investment analysis and financial underwriting. These services are crucial to any investment business. Some funds have all their financial people in-house (in which case, such personnel would be paid using the management fee). Others work with outsourced contractors to help fill out their team. The financial model is critical. An LP might request your financial model, so you want to have something professional (and correct) to give them.

LAWYER (REQUIRED — AND DELIGHTFUL)

Lawyers are consistently everyone’s favorite people (at least that’s what I tell myself at night). Your lawyer will be the quarterback throughout the whole fund-formation process, managing several crucial aspects of building your fund, including the following:

• Choosing the business and legal terms of your fund/syndication (Chapter 6)
• Drafting fund documents (Chapter 8)
• Forming legal entities (Chapter 8)
• Negotiating with investors (Chapter 9)
• Handling securities filings with the SEC (Chapter 10)

After your fund or syndication is formed, your lawyer should stick around to help with any questions or projects you might have while running the fund. Ongoing maintenance items could include:

• LP transfers (an LP wants to sell their interest)
• LP consents (the GP needs LP approval to do something)
• Subsequent closings (see Chapter 5)
• General fund-related questions and regulatory matters

CPA (REQUIRED)

Taxes can get complicated quickly for funds and syndications. You’ll need a good certified public accountant (CPA) to help prepare the fund’s tax returns and issue K-1s to LPs. When interviewing CPAs, ask about their track records for getting K-1s out on time. LPs don’t love receiving their tax forms in August.

Your CPA can also help with special tax structuring if you have non-US LPs, non-US investments, or tax-exempt LPs. This is especially relevant for real estate funds and syndications.

AUDITOR (REQUIRED — SOMETIMES)

Many investment funds have their annual financial statements audited. Some investment funds are legally required to have an annual audit (check out Chapters 14 and 15). Other funds do not need to engage an auditor. Ask your lawyer!

Even if an audit isn’t legally required, larger funds with sophisticated LPs often have their annual financials audited regardless. If you’re raising more than $50 million (or perhaps even less), LPs may demand an audit.

COMPLIANCE OFFICER (REQUIRED — SOMETIMES)

Many funds employ someone dedicated to compliance matters. This is especially true for private equity funds, hedge funds, and credit funds that are registered investment advisers (RIAs). Ask your lawyer whether you’re legally required to have a chief compliance officer—it depends on your fund type and total assets under management. We’ll discuss the regulatory landscape in detail in Part II.

As a general rule:

• Most Regulated: Private equity, private credit, hedge funds
• Medium Regulated: Venture capital
• Least Regulated: Real estate

Some funds and syndications opt to work with an outsourced compliance consultant to help them comply with the Investment Advisers Act and file/update Form ADV, a required disclosure document for RIAs (we’ll discuss this further in Chapters 14 and 15). These consultants are often less expensive than an attorney (but not always).

⚠ FUND TRAP #3: TRYING TO DO IT ALL YOURSELF

Raising an investment fund or syndication is not something you can do alone. Some emerging managers try to cut costs by doing fund administration, compliance, and (gasp!) legal work themselves. This is a well-trodden road to disaster.

Our firm once had a potential client who tried to draft the fund documents themselves. Evidently, they thought using an online form limited liability company (LLC) agreement would do the trick. Ultimately, the fund documents lacked all the key terms we’ll discuss in Chapter 6. They also handled compliance themselves and were running afoul of a state investment-advisers law. They came to us to “fix” their fund, but we declined to engage. At a certain point, a situation can become so radioactive it is nearly impossible to remedy.

FUND ADMINISTRATOR (OPTIONAL)

A fund administrator will make your life a lot easier. They help handle the day-to-day back-office work of running a fund or syndication, including:

• Onboarding investors
• Keeping books and records
• Issuing capital calls (getting money from LPs)
• Making distributions (sending money to LPs)
• Handling expense reimbursements
• Coordinating with auditors and other service providers
• Serving as the third-party “referee” between the GP and the LPs

While not legally required, I recommend working with a good fund administrator once your budget supports it. It’s a fund expense!

DESIGNER (OPTIONAL)

Many investment firms enlist a designer to make their websites and marketing decks beautiful. In some cases, the designer might also help with the private placement memorandum (PPM), creating delightful graphics and charts.

FUNDRAISER (OPTIONAL — BE CAREFUL!)

Funds need to raise money!

GP principals are often heavily involved in fundraising, but they might also hire dedicated investor-relations and fundraising personnel to add fundraising firepower. Some funds work with a placement agent to help raise money. A placement agent is a Financial Industry Regulatory Authority (FINRA)-registered broker-dealer who typically earns a commission for raising capital.

If you are paying someone to help you raise money and compensation is conditioned on successful fundraising (“success fees”), ensure the fundraiser is a registered broker-dealer. Otherwise, both you and the fundraiser may be subject to penalties.

INSURANCE AGENT (OPTIONAL)

Funds need all kinds of insurance, and a dedicated insurance agent can be helpful. In addition to insurance specific to your asset class (e.g., liability insurance, representation and warranty insurance, flood insurance), you might also consider purchasing directors and officers (D&O) insurance. D&O insurance protects the fund’s principals if they are sued for fund-related matters. Most fund documents indemnify the GP for lawsuits related to the fund (in the absence of fraud or gross negligence), but having a second layer of protection is never a bad idea.

Now that you have a sense of who you need on your team, it’s time to get serious about fund structures. The first branch on the decision tree is crucial — do you want to raise a multi-asset fund or invest deal by deal with syndications?

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