So You Want to Launch a Private Fund?

At some point, many RIAs begin exploring whether a private fund makes sense for their business. Maybe it’s an opportunity to offer clients access to alternative investments, implement a specialized strategy, or bring multiple investors together in a single vehicle.

Whatever the reason, launching a private fund involves much more than simply creating an LLC and accepting investor money. There are legal, operational, accounting, and compliance considerations that need to come together before the fund is ready to launch.

While every fund is different, most launches follow a similar path.

Start with the Structure

One of the first decisions is determining how the fund will be structured. Most private funds are formed as either a limited partnership or limited liability company. In addition to the fund itself, many advisers establish a separate entity to serve as the manager or general partner.

This is where experienced fund counsel becomes invaluable. The selected structure can impact everything from governance and liability considerations to how investors are admitted and how fees are paid.

One thing firms often overlook is that the manager entity has its own compliance and operational considerations. Before creating multiple entities, it is important to understand how they will interact, what disclosures may be required, and how responsibilities will be divided between the adviser and the manager.

Build Your Team Early

Launching a private fund is not something most firms should tackle alone. Building the right team early can save significant time, expense, and frustration later in the process.

First and foremost, you’ll want an attorney with private fund experience. Fund counsel typically serves as the quarterback of the launch, helping draft documents, structure the offering, and navigate securities law requirements.

You’ll also likely need a fund administrator. Administrators can assist with investor onboarding, capital account tracking, performance calculations, investor statements, and many of the operational functions that become increasingly important as the fund grows.

Don’t forget about the auditor. Even if the fund has not yet accepted capital, involving an auditor early can help avoid surprises related to financial reporting, valuation methodologies, and annual audit requirements down the road.

From a compliance perspective, it is much easier to establish relationships with service providers before launch than it is to change providers after investors are already in the fund.

The Paperwork Is More Than Just Formation Documents

One common misconception is that launching a fund is simply a matter of filing organizational documents with the state. In reality, the governing and offering documents are often the most significant part of the process. Depending on the structure, fund counsel will typically prepare documents such as:

• Private Placement Memorandum (PPM)
• Operating Agreement or Limited Partnership Agreement
• Subscription Documents
• Manager or General Partner Organizational Documents
• Investor Questionnaires and Certifications

The PPM serves as the primary disclosure document for prospective investors and generally outlines the investment strategy, material risks, fees, conflicts of interest, withdrawal rights, valuation practices, and other important information.

The Operating Agreement or Limited Partnership Agreement establishes how the fund will function, while subscription documents are used to gather investor representations and confirm eligibility requirements.

Although many advisers focus heavily on the investment strategy, the offering documents often become the foundation for future compliance obligations. Taking the time to carefully review disclosures on the front end can prevent significant issues later.

Don’t Forget the Compliance Program

Before the first investor is admitted, advisers should take a step back and evaluate whether their compliance program is equipped to oversee a private fund.

Many firms discover that policies written for a traditional advisory business do not fully address the unique challenges associated with managing a private fund. For example, how will shared expenses be allocated between the adviser and the fund? How will investment opportunities be allocated between private fund investors and separately managed accounts? What happens if an employee wishes to invest in the fund?

These are questions regulators often ask during examinations, and they are much easier to address before launch than after the fund is operational.

Understanding the Offering Exemption

Most private funds rely on an exemption from registration under Regulation D. The specific exemption selected can impact how the offering is marketed, whether general solicitation is permitted, and what investor verification requirements apply. This is another area where legal counsel should provide guidance, as the requirements can vary significantly depending on the exemption being utilized.

From a compliance perspective, firms should ensure that marketing activities remain consistent with the exemption being relied upon. It is important that enthusiasm for raising assets does not inadvertently create regulatory issues.

Update Your Regulatory Disclosures

As the launch progresses, advisers should review their regulatory filings and disclosures. Depending on the circumstances, Form ADV may need to be updated to reflect:

• Private fund management activities
• Related persons
• Conflicts of interest
• Additional compensation arrangements
• Assets under management reporting
• Custody-related disclosures

Firms should also consider whether updates to client agreements, marketing materials, websites, and compliance manuals are necessary.

Form D and Blue Sky Filings

Once the fund begins accepting investors, the regulatory filing process is not over. Most Regulation D offerings require a Form D filing with the SEC, generally within 15 days after the first sale of securities. In addition, notice filings—commonly referred to as Blue Sky filings—may be required in states where investors reside.

State filing requirements vary and may include filing fees, consent to service of process forms, and other notice requirements. Many firms rely on counsel or specialized filing services to coordinate these submissions.

Missing a filing deadline can create unnecessary complications, making it important to identify filing responsibilities before subscriptions begin.

Think About Side Letters Before You Need Them

Another topic that deserves attention early in the process is side letters. As assets grow, investors may request special terms related to fees, reporting, liquidity, transparency, or other operational matters. While these requests may seem straightforward, they can create conflicts, disclosure obligations, and operational challenges if not handled properly.

One thing firms often overlook is that side letters are much easier to evaluate when a framework already exists. Establishing guidelines before the first request arrives can help ensure consistency and avoid unintended preferential treatment concerns.

Common Pitfalls During a Fund Launch

Over the years, a few themes seem to surface repeatedly:

• Waiting too close to anticipated launch date to engage fund counsel
• Selecting service providers solely based on cost
• Failing to document valuation procedures
• Overlooking expense allocation methodologies
• Forgetting to update Form ADV disclosures
• Accepting investor subscriptions before all documents are finalized

Most of these issues are avoidable with proper planning.

Launch Day Is Just the Beginning

One of the biggest mistakes firms make is viewing the fund launch as the finish line. In reality, it is the starting point.

Once the fund is operational, firms should have processes in place for ongoing oversight, including annual audits, investor reporting, valuation reviews, expense allocations, regulatory filings, books and records maintenance, and periodic updates to compliance disclosures.

Launching a private fund can be a rewarding way to expand an advisory business, but it requires thoughtful planning and coordination. Bringing the right professionals to the table early, and considering the compliance implications from the outset, can make the process significantly smoother for everyone involved. As with many compliance matters, the work done before launch often determines how smoothly things operate after launch.