Well Defined Target Investors: How to Create Building Blocks for a Successful Fund Structure
Before fund managers can effectively evaluate fund structures, they must answer a basic question: Who will our investors be? That means deciding whether the fund will focus on reducing costs and complexity — or if it will open to both U.S. and non-U.S. investors, along with the accompanying tax, regulatory, and reporting challenges.
Unless fund managers thoroughly explore this issue, they will struggle to find a structure that fits both the investors and the fund strategy.
When identifying your targeted investor profile, do not rush the process. Your choice plays an essential role in determining the fund structure and the country to domicile and the regulatory compliance requirements that the fund will be subject to.
The choice of fund structure and domicile can be impacted by the investors’ tax status, regulatory compliance requirements and privacy laws. In addition, retail and institutional investors have different impacts on fund structure choice. With that in mind, let’s explore some of the ways that careful evaluation of target investors can affect your operational success.
How Your Investors May Affect Location Considerations
Will your fund target U.S. accredited or qualified investors? If so, this will affect the different compliance issues or exemptions you’ll need to consider.
For tax purposes, U.S. institutional investors may want to invest through a Cayman Islands domiciled feeder fund. The Cayman Islands offer a business-friendly environment that allows managers to establish and register funds quickly. The Cayman Islands Monetary Association — or CIMA — oversees the jurisdiction’s financial services regime, and it’s important to be aware of its reporting and directorship requirements. For example, the CIMA’s corporate governance statement provides guidance to keep full, accurate, and clear written records of meetings, including meeting agenda with attachments, list of attendees, description of the manner of the meeting, matters considered, and decisions made.
In the European Union, investments must operate under a different regulatory framework. For this region, retail funds are subject to the Undertakings for Collective Investment in Transferable Securities Directive (UCITS), which ensures a high level of investor protection.
Three Words to Help Ensure Your Success: Keep It Simple
When creating a durable foundation for your fund’s long-term success, attention to detail is good — but unnecessary detail is not. Don’t overcomplicate your approach to fund structures. Instead, focus on what’s relevant for your respective investor category.
For example, if your initial investors are U.S. accredited, it makes sense to start with a Delaware Limited Partnership or Limited Liability Company. As the investor base grows, you can consider establishing an offshore Feeder Fund.
By avoiding more elaborate structures, you will reduce administrative burdens and increase efficiency and your ability to control costs. These are operational strengths that will please investors who care about business performance and long-term value creation.
The same approach applies to European investors. Don’t launch your fund with a cross-border structure — instead, keep it simple.
Make sure you bring clarity to your investment policies, define your investment strategy for potential investors, and include a list of any investment exclusions, such as countries or sectors where the fund won’t invest. Our global team consults with investment managers on new fund launches. Learn more about Swiss Financial Services Market Entry Service Offering by reaching out to a member of our team.