Starting a Fund: Service Providers
Launching a new fund means finding and hiring service providers who can handle everything from fund formation to an annual audit and generally make life easier for GPs. We’ve put together a quick guide to help navigate your options and hire the right service providers for your fund.
Fund Administration. Choosing a fund admin is one of the most important operational decisions you’ll make as a GP. Your fund admin will be closely involved in the day-to-day activities of the fund, such as onboarding LPs, performing due diligence checks before accepting LPs into the fund, making capital calls, handling LP reporting and consents, and making distributions to your investors. Some fund admins also offer accounting services, which can facilitate reporting to LPs (as long as the firm has the right knowledge and expertise – more on fund accountants below). We’ve seen first-hand how a fund admin can either facilitate the success of your fund or create major roadblocks and delays. The best fund admins will streamline back-office operations and allow GPs to focus on bringing in investors and deploying capital, while others can be disorganized, slow to respond, and bureaucratic. When evaluating fund administrators, our main piece of advice is to reach out to your network for their recommendations and experience with the firms you’re considering. Many firms offer the same general range of services, so these personal experiences can often be a critical deciding factor.
Here are a few helpful questions to ask before signing on with a fund admin: (1) are there any services that our fund may need that are not included in the proposed scope and fees; (2) what other costs can we expect to incur annually; (3) do you have any limit on the number of LPs, frequency of reporting or capital calls, or the size of the fund you can service; (4) what is the timeline we can expect in onboarding a new LP; (5) can you accommodate onboarding outside of the fund admin’s platform; and (6) why do fund managers choose you over other fund admins.
Accounting and Auditing. The primary responsibility of a venture fund accountant is to generate all financial reporting for the fund. Accounting for VCs can be more complicated than traditional accounting, however, so it is important when choosing an accountant to confirm that the firm has specific experience with funds at similar stages and sizes as your own and is equipped to address complex valuations and cash flows. We often see institutional LPs make specific requests for reporting or other information that not all accounting firms can accommodate, such as monthly financials or providing additional disclosures beyond what is required in the LPA. Before retaining an accountant, check if they have the capacity to respond to one-off requests and to issue reporting on different schedules and deadlines. We also recommend asking if the firm will need a minimum time frame to prepare your financials. GPs should have a good understanding of the timing they can expect from their accountant and whether this could slow the operation of the fund. The last thing you want is to breach of one of your side letter obligations because your fund accountant didn’t do their job on time.
Most institutional LPs will require that the fund is audited each year to confirm that the fund’s financials are in order and that the fund is in compliance with its LPA. The fund will engage an auditor to review materials such as portco valuations, financial statements, fund expenses, and management fees to confirm their accuracy or determine any inconsistencies or unreasonable assumptions made by the fund. The audit process is time-consuming and expensive, as GPs will need to work with their teams and fund admins to gather extensive materials and make themselves available to answer questions and respond to additional requests for information throughout the audit. Because this can be such a heavy lift, many first-time fund managers will skip an audit in the early years of their fund if not required by an LP. We’ve seen that annual audits can generally provide greater transparency and credibility to current and potential investors even when not required, but ultimately this is a decision for the GP based on the needs of the fund and expectations of its LPs. Note that funds that are registered with the SEC must complete an annual audit regardless of LP requirements.
Legal. Before you launch your first fund, you’ll need fund counsel to form the fund and prepare your term sheet; review your marketing materials, disclosures, and data room; draft your LPA and all other fund agreements, and, perhaps most importantly, counsel you on the key terms of those agreements so you have a firm grasp on how they will impact you and your LPs throughout the life of the fund. We handle LP negotiations and side letters, and, once you start deploying capital, we perform due diligence on your target portcos and negotiate the terms of each financing.
Compliance. Launching a new fund also means complying with various regulatory requirements, including federal and state securities laws. The first close of the fund will trigger certain deadlines and detailed reporting requirements with the SEC and state regulators, and you will need to determine whether you qualify as an exempt reporting advisor under the Investment Advisers Act and complete the relevant registration. We typically refer our clients to a great compliance firm to handle this work, which is a more cost-effective approach for GPs.
Placement Agents. Placement agents assist in the fundraising process by introducing GPs to investors and identifying prospective LPs who may be likely to invest in the fund. Placement agents are typically compensated with a success fee, which will be a percentage of any LP commitments that come into the fund through the placement agent’s introduction. Whether to retain a placement agent depends on a few factors, mainly the size of the fund and the GP’s capacity for fundraising – incurring these fees may not make sense for smaller funds with an existing investor pipeline.
-- Molly Tranbaugh
