Fund formation and first-time fund managers
Do I need a fund administrator for a small fund?
Short answer
Often not on day one, but plan on it early. A small fund with friends and family money can sometimes run without one. Once you approach institutions or larger investors, they ask who your fund administrator is. I would treat it as part of the platform you build as you grow. Check with securities counsel on what applies to your fund.
Whether you need one depends on who your investors are and how big you want to get. Many small funds begin without one, and the right timing differs from fund to fund. Your investors or lenders may ask for one, though, and sponsors often review this with counsel when they draft their fund documents. A securities attorney can talk through what fits your fund.
Friends and family money asks fewer questions
When a fund is small and the investors know you personally, the diligence is light. I see this with the first type of hedge fund investor, the high net worth individual. They often do the least due diligence and invest based on referral and personal relationships. The sales cycle can be the shortest.
That is why many managers start without an administrator. Nobody at the table is asking for one. The trouble comes when you want to move past that first circle.
What happens when institutions start asking
My friend John told this story on stage at our summit. His early raise was friends and family, and it was hard. Then he started talking to institutions and the questions changed. They asked for his audit. They asked who his fund administrator was.
John and I talk about what an institutional platform includes, from audits to a fund administrator.
Summary and key takeaways from this video
John had only $10 million under management when he got his first audit. He did not wait until he was big. He built the platform first, then the money followed.
"No institutional will invest with you without an institutional platform, and you have to be able to pass there."
He also said the cost was real. He was not making a ton of money in the fund at the time. He did it anyway. After he hired a fund administrator that produces his NAV monthly, he said the money really started coming in.
Family offices look hard before they write a check
Family offices tend to have more barriers than individuals. They conduct more due diligence and may negotiate harder on fees. In my experience some will not look at a hedge fund until it reaches $30 million to $50 million in assets, and sometimes $100 million or more. An independent administrator is one of the things that makes a small fund look ready when that day comes.
John describes how the diligence process for a large institutional ticket reached his administrator, accountants and counsel.
Summary and key takeaways from this video
It took nine to 12 months to get his first big ticket. Having those pieces in place before you ask saves you from scrambling during that process.
A simple way to decide
Ask yourself who you plan to raise from. If it is a handful of people who know you well, you may be fine for now. If you want family offices, endowments or pensions, start talking to administrators early. Get quotes. Ask what they do for funds your size. Then decide with your attorney and accountant.
From my books and event talks
One thing I would add is that momentum matters to the people writing the checks. In my experience investors would rather see you fill a smaller fund than watch you launch another fund, then another fund, then another. They want to see how each one performed over time. So a small fund run cleanly, with an administrator producing the numbers, becomes your track record. It gives the next investor a record to look at, and in many cases that can make a second raise easier than the first.
"People like to see momentum. They'd rather see you fill a smaller fund than another fund, than another fund, than another fund, and see how those different ventures performed over time."
Facts and figures
- John got his first audit when his fund had only $10 million in assets under management.
- John's fund administrator produces his NAV on a monthly basis, which he said helped the institutional money start coming in.
- Some family offices will not invest in a hedge fund until it reaches $30 million to $50 million in assets, and sometimes $100 million or more.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Growing Platforms, Structuring Deals & Raising Capital in Real Estate Credit, How to Build a $1B Real Estate Platform | John Lettera & Richard C. Wilson, 5 Types of Hedge Fund Investors. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around administrator requirements, offering documents and fund structuring. Do not use AI to write your own legal agreements.
Next moves
- 1List the investor types you plan to raise from over the next 24 months.
- 2Ask securities counsel whether your fund documents or investors require an administrator.
- 3Get quotes from two or three independent fund administrators.
- 4Line up an audit firm so your financials are ready when investors ask.
- 5Add your administrator, auditor and counsel to your investor materials.
People also ask
When should a small fund start talking to an administrator?
Before your first outreach to institutions or family offices. John said the questions about his administrator came as soon as he started hitting institutions. Having an answer ready can save time.
Will an administrator help me raise money?
It does not raise money for you. What it does is help you pass the diligence that institutions run. John said that after he hired his administrator and had audits, the money really started coming in.
Do family offices care if I use an administrator?
Many family offices run more diligence than individual investors do. Expect questions about your service providers. How strict they are varies from one family office to the next.
Related questions
- What is the biggest challenge for first-time fund managers raising capital?The biggest challenge is earning trust before you have a track record.
- How do I form a Delaware limited partnership for a fund?Many sponsors work with an attorney on the state filings and a limited partnership agreement.
- How long does fund formation take from start to launch?There is no single number, because fund formation runs on two clocks.
- How much does it cost to set up a private fund?It depends on the structure, the number of investors and the law firm, so I won't give you one number.
Work through it with the one-liner builder. See all fund formation and first-time fund managers resources.