Setting up your Fund+ includes the ability to set unique fund parameters in accordance with your investment strategy or to respond to the needs of your investors. These are the parameters that you can customize.
Please note that the parameters are locked from further changes once your deal has been approved.
Maximum Fund Size
The Maximum Fund Size lets your investors know the maximum size of your fund. It is a required parameter for you to set up your fund.
Typically, this value is set higher than your Target Fund Size. For example, if a fund manager is aiming for a $2M fund, they may set the maximum fund size to $10M. A fund’s investors refer to this value to understand the potential range of their ownership interests in the fund over time.
This value will be stated in your Fund’s operating agreement, so if you end up exceeding this amount, you will need the consent of your fund’s members to do so.
Final Closing Date
This parameter determines the final date when new interests in the fund will cease being issued. Interests may still be transferred by members, but no new interests may be issued. Effectively, this is the close of your fundraising period. This Final Closing Date is specified as a number of months from the “Initial Closing Date”, which is when the very first investor becomes a member of your fund.
You can set the Final Closing Date as 12, 18 or 24 months from this Initial Closing Date.
Investment Period
The Investment Period is the period of time the fund may make investments. The Investment Period is technically from the Initial Closing Date until a number of years following the Final Closing Date. When setting up your fund, you are asked to set your desired number of years after your Final Closing Date to make investments. Your options are 2-7 years after the Final Closing Date.
This parameter allows investors to have an expectation of the lifespan of their investments so that they can plan their capital to ensure they can meet their stated commitments.
Minimum Fund Size
This is an optional parameter for you to indicate the minimum total commitments your fund needs to receive from your members before you may issue a Capital Call.
Investors may be interested in seeing this information as a form of guarantee that you will only call capital when your fund has received sufficient commitments to make investments.
Management Fees
Your Fund+ offers three different management fee structures based on the time period and management fee variables you wish to employ.
- Life of the fund
This is the simplest management fee structure where the management fee, based on a single percentage of the investor’s commitment, will be charged until the fund dissolves. - Investment Period
Under this management fee structure, your investors will be charged an initial management fee during the period of time your fund may make investments, and then a different management fee for the remainder of the life of your fund. Thus, you may charge a certain management fee during your Investment Period, and then charge a lower management fee afterwards to reflect a decrease in activities when you are no longer making investments through the fund. - Decreasing after the investment period
This management fee also permits you to charge a new management fee after the Investment Period, but with the option of decreasing your management fee annually by a certain “Annual Reduction” percentage until your Management Fee percentage reaches a “Minimum”.
For example, your fund’s management fee could be 2% during its Investment Period, then the first year afterward will be 1.5%, and then 1% the following year, where it will remain as 1% per year thereafter because that the Minimum has been reached.
Tiered Carry Interest
Before we can explain how tiered carry interest works, we must first understand how carry interest is currently distributed.
The way distribution is conducted, and as stated in your fund’s operating agreement, is in the following order:
- Investors receive 100% of their capital contributions to the fund,
- The Advisor takes its carry interest from the remainder; then
- The final remainder is distributed to investors pro-rata.
With tiered carry interest, you have the option to set a single carry interest percentage for the above distribution method. However, you may also add a “carry tier” where you then introduce one additional step for you to take a new carry percentage once your investors have received a specified multiple of their returns:
- Investors receive 100% of their capital contributions to the fund,
- The Advisor takes the “Default Carry” of, say, 20%, afterwards
- Investor continues to receive distribution until 1x, 2x, etc of the investors’ contributions (i.e. the “Hurdle”) have been met, then
- The Advisor takes a second “Carry after hurdle” from the remainder; and finally
- The final remainder is distributed to investors pro-rata.