Investment Fund Closing Timeline – 10 Steps

Michael Bjorn Huseby

Here, we’ll discuss a simplified roadmap to closing your first investment fund.

Each fund is unique and this article provides only a high-level overview. You’ll work with your legal counsel every step of the way to ensure you raise your investment fund efficiently and successfully.

The 10 steps are as follows:

  1. Fund Structuring and Regulatory Analysis
  2. Summary of Terms
  3. Marketing Deck
  4. Identify Service Providers
  5. Form Legal Entities
  6. Draft Principal Fund Documents
  7. Investor (LP) Negotiations
  8. Collect Investor (LP) Subscription Documents
  9. Hold Initial Closing
  10. Call Capital

Here’s a link to the full-sized investment fund formation timeline.

Emerging Manager Investment Fund Formation Timeline

1. Fund Structuring and Regulatory Analysis

On the kick-off call, you’ll discuss your goals with your legal counsel. This is where you determine the structure of your fund entities (Fund, General Partner, Management Company, etc.). Here’s a very basic example of an investment fund structure chart.

Your ideal fund structure will depend on tax and regulatory considerations. The big three regulations to consider are the Securities Act, the Advisers Act, and the Investment Company Act.

2. Summary of Terms

Next up is your summary of terms. This is a 5-20 page document that covers each of the key terms relevant to investors (LPs). Along with your marketing deck, this is one of the key documents you’ll share with potential investors.

3. Marketing Deck

Your marketing deck is a short, aesthetically pleasing document that highlights your experience, thesis, and a few key fund terms. You will give this document to potential investors.

4. Identify Service Providers

You can’t run an investment fund on your own! You’ll need to identify a few trusted third parties to help make your fund a success:

  • Bank
  • Fund Administrator
  • Insurance (such as D&O insurance)
  • Auditors (if you plan to have yearly audits)
  • Placement Agent (if you want help finding LPs)
  • LP Onboarding (to sign up LPs as smoothly as possible)

Your fund counsel should be able to refer you to each of the above.

5. Form Legal Entities

Eventually, you’ll need to form the three main fund entities, which are:

  • Fund (typically a Delaware limited partnership)
  • General Partner (typically a Delaware limited liability company)
  • Management Company (typically a Delaware limited liability company)

During this time, you should also obtain EINs, set up initial agreements for each entity, and open bank accounts.

6. Draft Principal Fund Documents

Here’s where things start getting serious. You will work with your legal counsel to draft the following documents:

  • Fund Limited Partnership Agreement (LPA): This is the 50-100 page document that sets the rules of the road for your investment fund. This is basically a long, legalese version of the summary of terms.
  • Subscription Agreement: This is a document that prospective investors will eventually fill out, which contains representations and warranties, an investor questionnaire, and the investor’s subscription amount.
  • Management Agreement: This is a relatively short document where the Management Company agrees to manage the Fund.
  • Private Placement Memorandum (PPM): This is a disclosure document that contains a summary of the sponsor and its management team, a description of the investment opportunity, and a long list of risk factors related to the fund. Some funds don’t have a PPM, in which case you will include a disclosure at the end of your subscription agreement instead.

7. Investor Negotiations

If you have institutional LPs, they will likely have some comments on your fund’s LPA. If they do, you have two options:

  1. Revise the LPA to make the investor happy; and/or
  2. Give the LP a “side letter” that gives them special terms not present in the LPA.

8. Collect Investor Subscription Documents

LPs will start filling out subscription documents with their desired investment amount. You or your legal counsel should review these documents to make sure they are filled out correctly. Typically, you will also request tax forms (W9 or W8). You may also require KYC (“know your customer”) documents and, if you are raising a fund using Rule 506(c), verification that the LP is an accredited investor.

As the General Partner, you won’t countersign the subscription documents until you hold your fund’s initial closing.

9. Initial Closing

Once you’ve collected enough subscription documents to hold a defensible initial closing, you will countersign each LP’s subscription documents. You will also sign the LPA, the Management Agreement, and any side letters. Typically, you will file a Form D with the SEC, which will let you avoid officially registering the fund’s LP interests as securities with the SEC.

10. Call Capital

After the initial closing, you’re ready to call capital and start making investments. Congrats!

*While I am a lawyer, I am not your lawyer. Nothing on this site (including the blog) should be taken as legal advice. This site is for informational purposes only. If you have any legal questions, please retain an attorney. This is not an advertisement for legal services.