Private Funds

We advise clients across the country on how to organize private funds and how to offer and manage participation by a class of passive investors in partnership with federal and state securities regulators. Private funds vary in how they pool money from investors, how they deploy that capital into investments, and how they pay returns.

How do private funds pool money from investors?

While venture capital and private equity funds traditionally call down capital from investors over time to accommodate investment needs, other types of funds such as qualified opportunity funds, cryptocurrency funds, and hedge funds generally require upfront cash contributions from investors to expedite investment decisions.

How do private funds make investments?

Qualified opportunity funds, real estate investment funds, venture capital funds, and private equity funds typically focus on private, illiquid assets like startups, growth-stage companies, and real estate assets. On the other hand, cryptocurrency funds and hedge funds are more likely to invest in liquid assets like publicly traded securities or digital assets.

While venture capital funds usually adopt an advisory role to their portfolio companies, providing operational, strategic advice, and networking opportunities and often holding positions on company boards, private equity funds often actively participate in company management, particularly when acquiring a controlling interest. Qualified opportunity funds may adopt either approach based on fund management expertise and the size of the investment.

How do private funds pay returns?

Provisions governing waterfall distributions set forth the timing and amounts of cash available for distribution, as well as order and priority. We advise clients on industry standards and emerging trends, including performance thresholds, calculations of carried interest, partnership flips, the relationship between distribution and tax allocation provisions, and how to manage phantom income tax liability.

What are the key considerations when starting a private fund?

Legal Structure: Establishing a private fund and any associated management entities requires legal formation. Most contemporary private funds are structured as limited liability companies, with the sponsor appointed as manager and the investors as non-voting members. Vintage private funds, or contemporary private funds with foreign investors, are often structured as limited partnerships, with a general partner and investors acting as limited partners.

Capital Raising: When considering raising capital, fund managers must consider factors such as their investment focus, geographic targeting, and any existing track records. Keep in mind that raising funds is subject to federal and state securities laws and usually occurs through exempt offerings that align with an exemption from registration under the Securities Act, like Rule 506(b) or Rule 506(c) of Regulation D.

Documentation: The offer and sale of passive equity interests are governed by federal and state securities laws, meaning sponsors have a legal obligation to disclose to prospective investors the terms of the offering as well as any risks that are material to making an informed investment decision. These offering documents are typically comprised of the following materials:

  1. Private Placement Memorandum (PPM): A legal document outlining the offering terms and material risks to enable informed investment decisions.
  2. Business Plan: A summary of the company's objectives and financial projections. While not a legal document, it should be current and regularly updated to reflect changes.
  3. Subscription Agreement: A legal document used to finalize the investment, allocate risk, and affirm investor representations.
  4. Operating Agreement: A document defining the relationship, duties, and rights between the sponsor and investors.

Sponsors that provide information with misrepresentations, misleading statements, or material omissions are subject to civil liability and criminal prosecution, which underscores the importance of seeking the advice of securities counsel.