Fund formation and first-time fund managers
Why should the management company be separate from the fund?
Short answer
The two do different jobs, so many managers think about keeping them in different entities. The management company is the business that employs the team and earns fees. The fund holds investor money and investments. Many managers keep them apart to think through risk, ownership and adding more funds later. Family offices also look at both pieces, sometimes asking for a piece of the GP. Check the exact setup with securities counsel.
One pool of money, one operating business
I explain it to new managers this way. The fund is the pool. It holds investor capital and owns the investments. The management company is the operating business. It hires people, pays for the office, signs vendor contracts and collects the management fee. When both live in one entity, an operating dispute and a fund matter can get tangled together. Many managers talk to a securities attorney about how to structure the two.
Ownership is the second reason. The people who run the firm often own the management company, and they may bring in partners over time. The investors own interests in the fund, not in the business. If you want to add a partner, share fee income or sell a stake in the firm, that conversation tends to happen at the manager level, and many sponsors talk to a securities attorney about how it fits with the fund. The same holds when you raise a second or third fund. One manager can sit over several funds, each with its own investors and terms.
Kevin talks about backing Cypress Ascendant as a firm and also investing in its fund, which holds stakes in five direct to consumer companies.
Summary and key takeaways from this video
What family offices ask about the manager
Sophisticated investors look at both sides. In my talk on the types of hedge fund investors, I said family offices usually have more barriers before they allocate. They run more due diligence, they can negotiate harder on fees, and some ask for something on the manager side.
"They might want a piece of your GP if they're going to invest early on as an LP and be a big part of your LP base."
That request is about the management company, not the fund's assets. If the two are already separate, you have a clean place to have that conversation. I also mentioned that some family offices do not want to be more than 10 or 15% of your total LP base. That is a limit on the fund side, and it is one more reason to plan the structure early.
This clip walks through five types of hedge fund investors and how each one tends to approach a new manager.
Summary and key takeaways from this video
Practical points before you set up
- Think about how the fund and the management company will be set up and run day to day.
- Think about how money will move between the fund and the manager, and talk to a securities attorney about it.
- Be clear with investors about how the fee, any GP stake and expenses will work.
- Many managers ask a securities attorney about regulatory questions that may apply to them.
A smaller manager also needs a clear story. A panelist in one video said the very first thing she does with a new fund manager is rewrite the investment thesis, because most managers do not have one. Structure helps, but investors still want to know what you will do with the money and why you are the one to do it.
This panel covers why emerging managers struggle to raise capital and why a clear value proposition matters to family offices.
From the Family Office Club stage
When you plan a second or third fund, remember that investors like momentum. I tell managers that people would rather see you fill a smaller fund, then another, then another, and watch how each one performed over time. A separate management company makes that path easier because the same manager sits over each new fund. There is also a cheaper way to reward an early investor than giving up part of the manager. You can offer slightly better terms on the fund side, such as a lower management fee, a higher hurdle or a higher preferred return, so the investor feels more aligned.
"People like to see momentum. They'd rather see you fill a smaller fund, then another fund, then another fund, and see how those different ventures performed over time."
"And then you just incentivize them by having slightly better deal terms on the fund side. People could go straight to the fund and just make it more alluring, more performance based, lower management fee, somehow more aligned, maybe a higher hurdle, higher preferred return, perhaps. And then do both."
Facts from this talk
- Family offices may ask for a piece of the GP when they invest early as an LP and become a big part of the LP base.
- Some family offices prefer not to be more than 10 or 15% of a manager's total LP base.
- Cypress Ascendant's consumer fund has invested in five direct to consumer companies.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, Exclusive Centimillionaire Fireside Chat with Kevin Harrington (Original 'Shark Tank' Investor), Why Emerging Fund Managers Struggle to Raise Capital | Wealth Management & Investor Shifts. 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 manager and fund structure, fee and GP arrangements and regulatory registration questions. Do not use AI to write your own legal agreements.
Your next steps
- List what the management company will do and what the fund will hold.
- Decide who will own the manager and who will be in the GP.
- Consider talking to a securities attorney before you set up either entity.
- Plan for a second fund so the manager can sit above more than one.
- Write a clear investment thesis before you speak to family offices.
Follow-up questions
Does a small manager really need two entities?
Some managers start with two entities even for a first fund, while others take a different path. A securities attorney can talk through what fits your case.
Who gets paid by the management company?
The management company typically collects the management fee and pays the team and operating costs. Many managers talk to a securities attorney about how this should be handled.
Why would a family office want a piece of the GP?
In my experience, early investors who will be a big part of your LP base sometimes ask for a share of the GP as part of the deal. It is a negotiation, and it happens on the manager side.
Related questions
- What is a rolling fund and how does it work?A rolling fund is a structure where investors subscribe in recurring periods, usually each quarter, instead of everyone committing at one final close.
- How much capital do I need for a first close?There is no single number.
- How much should a GP commit to their own fund?There is no single number that fits every fund.
- What is an SPV and when should I use one?An SPV, or special purpose vehicle, is a separate entity formed to hold one investment, with investors pooled into it.
Work through it with the waterfall calculator. See all fund formation and first-time fund managers resources.