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  • How to Launch a Private Equity /

    Venture Capital Fund

    Structure, Key Fund Terms,

    LP Tips and Recommended

    Advisers

  • IntroductionDear Reader,

    The objective of this guide is to provide start-up private equity and venture capital managers with comprehensive, commercial advice on how to form and raise their first fund. Starting a new fund can be a daunting process, made all the more difficult by the lack of information available to help a prospective manager achieve its ambitions, but

    this guide seeks to provide you with some clarity.

    Investors are key to any fund launch. To help the process of winning over investors, MJ Hudson through its LP Unit (a team of lawyers advising

    investors on fund investments) spoke to a number of its clients to gather tips on how new private

    equity and venture capital managers should form a fund. Those tips are dotted throughout this guide.

    We cannot emphasise enough the importance of third party advisors in the nascent stages of fund formation. This is not meant to be a

    self-serving comment (although lawyers have an important role in fund formation), rather we are pointing towards other third party advisors

    such as accountants, placement agents and compliance firms, whose guidance is essential

    to the success of any fund.

    As part of this guide we have listed a number of trusted third party advisors who we have

    worked with over the years (see Part 5

    Recommended Advisers). These third party advisors have been integral to the formation

    of many of our clients funds.

    The decision by the UK to leave the EU in June 2016 ('Brexit') will have an impact on the fund

    management industry (eg, how the fund will be regulated, where the fund should be domiciled

    and how the fund can be marketed to investors). The ultimate impact of Brexit will depend on

    what terms the UK leaves the EU which means this is an evolving area and up-to-date legal and

    regulatory advice should be obtained.

    Prospective managers need to be acutely aware of the costs of fund formation and the level of

    financial commitment required from the manager.

    Although a large amount of costs will be covered by the fund on its establishment, a manager will have to cover its own costs and any interim costs out of its own pocket. In addition, managers are

    often required to invest alongside investors, so the managers commitment to the Fund can be

    substantial. To assist with understanding the costs of fund formation we have set out indicative pricing for third party advisors at Part 1 - Planning. These cost ranges are merely estimates, are subject to

    fluctuations and other costs may arise.

    As specialist alternative assets lawyers, we work with fund managers from inception to winding

    up of funds. We have built up a considerable level of knowledge on the various forms a fund can

    take, the legislation fund managers are required to comply with and the pitfalls a manager should

    avoid. Whilst this guide is intended to be as comprehensive as possible, no two funds are the

    same, and no fund is ever really plain vanilla.

    So when you want to start the process of setting up the Fund, please feel free to contact us so we

    can help you achieve your goals.

    We hope this guide serves you well with your new business plans and wish you the very best of luck.July 2016

    With kind regards,Eamon and Rob

    Eamon Devlin Managing Partner +44 (0) 20 3203 3207 / Eamon.Devlin@mjhudson.com

    Rob Eke Associate +44 (0) 20 3463 3203 / Robert.Eke@mjhudson.com

    How to Launch a Private Equity / Venture Capital Fund

    2

  • Index1. Planning

    Fund Q&A 6

    External advisers 7 - 8

    Advisers fees 9 - 10

    How to choose a structure for the Management Group 11

    What are the other business considerations? 12

    What are the key considerations on a spin-out? 13

    Timetable to closing 14

    2. Structuring

    What are the key considerations when structuring a Fund? 16

    Choice of Domicile 17 - 18

    Why Onshore? 19

    Why Offshore? 20

    What are market terms for a 100 million Fund? 21

    What are the key Fund documents? 22

    3. Marketing and Regulation

    How is a private equity fund marketed? 24

    Marketing and Regulation 25

    What are the regulatory issues when marketing 26

    Marketing by a Sub-threshold AIFM 27

    Marketing by a Non-EU AIFM 28

    What is meant by "Marketing" 29

    What is reverse solicitation? 30

    How is a private equity manager regulated? 31

    AIFMD 32

    How to Launch a Private Equity / Venture Capital Fund

    3

    4. Typical Fund Terms

    What are the typical terms of the Fund? 34 - 36

    5. Recommended Advisers

    Recommended Advisers 38 - 52

  • All of the costs and structuring suggestions contained in this guide in the context of a hypothetical Fund with the following headline terms:

    Notes on the guide

    CarryA share of any profits that the general

    partners of private equity funds receive as compensation.

    Cornerstone investorAn investor who commits a large

    proportion of the Funds total commitments and whose commitment will be used to

    draw in additional investors.

    FundThe investment fund established by the

    Management Group.

    General Partner The entity that acts as general partner to the Fund, if the Fund is structured as

    a limited partnership.

    Hurdle A hurdle rate is the minimum rate of

    return on a project or investment required by a manager or investor. In order to

    compensate for risk, the riskier the project, the higher the hurdle rate.

    IRR A measure for evaluating performance of

    investments. The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum

    required rate of return the cost of capital then the decision would generally be to

    go ahead with it.

    Investment Adviser An entity appointed by the Manager to

    provide recommendations on investment and divestment decisions. For some

    Management Groups, the functions of Manager and investment adviser may

    be done by the same entity.

    Management Group The Manager (unless the Manager is a third

    party service provider), the General Partner of the Fund (and any future General Partners of future funds), the carried interest vehicle, and

    an investment adviser, if appointed.

    This is interchangeable with GP and Sponsor in their general senses.

    ManagerThe entity specifically appointed to

    manage the Fund.

    Regulatory Umbrella An FCA authorised entity through which

    an unauthorised firm can use its regulatory provisions to (under supervision of the

    Regulatory Umbrella) market the Fund and provide investment advice to the Manager.

    The private equity and venture capital industries employ an extensive, and sometimes bewildering, body of jargon. We have attempted to limit our

    use of jargon to the following key terms:

    New private equity or venture capital fund manager.

    A maximum of 100m of

    commitments to the Fund.

    Closed-ended (ie, investors are locked in for the life of the Fund).

    The investors are a mixture of HNWs family offices, funds of funds and institutions.

    English, Scottish or a Channel Islands Limited Partnership.

    Most of the investment team is

    based in Europe.

    " A well-known cornerstone investor is usually helpful, not only for the fund but also for strategic advice however, they might ask for a sweet deal."

    Peter Schwanitz, Managing Director Portfolio Advisors

    How to Launch a Private Equity / Venture Capital Fund.

    4

  • Fund Q&A 6

    External advisers 7 - 8

    Advisers fees 9 - 10

    How to choose a structure for the Management Group 11

    What are the other business considerations? 12

    What are the key considerations on a spin-out? 13

    Timetable to closing 14

    1Planning

  • Fund Q&AWhat is the Funds Investment Thesis?

    This is a fundamental decision for the Management Group and it is vital that the

    investment thesis is able to satisfy the following, in the minds of investors:

    1. There are sufficient investment opportunities available for the Fund to

    invest all of its committed capital

    2. There will be a market to sell the Funds investment interests within the

    duration of the Fund

    3. The Management Group has sufficient skill, experience and relationships to

    successfully execute the investment thesis

    Ideally, the investment thesis will feel like an extension of the team.

    What should I call the Management Group and the Fund?

    Whilst a specialist marketing agency can develop a full brand and visual identity for

    the Management Group and related entities, there is not always time or budget for this. In any case, care must be taken to ensure that

    the name chosen for the Management Group and the other entities does not infringe on

    the registered intellectual property of others. The use of a trade mark or naming agent can streamline this process. Care must be taken

    not to use a name that may be restrictive, in the future. Ideally, the name of the fund will include

    the name of the Management Group and also clearly and succinctly express the investment thesis, so that potential investors are quickly

    able to grasp the opportunity presented.

    Who will be in the team?

    The members of the team must have

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