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Funds are typically comprised of a whole host of different individuals coming together to form a profitable endeavor.
This is especially true once you scale.
For example, Berkshire Hathaway employs over 392 THOUSAND people. That’s not a typo.
To put that in perspective the STATE of Wyoming has a population of just over 500 thousand.
That’s one heck of a payroll.
But it’s more than worth it so as to ensure that the fund continues to perform at a high rate and sustain growth globally.
Now, if you’re reading this you probably aren’t looking to launch a fund that will rank in the top 100 in company size on the planet.
At least not yet.
You’re probably looking for a few select people who can help put you over the hump.
And that’s one of the biggest keys. You can’t be selfish in this business.
If you want to grow you’ve got to look for other people that can help you.
Today we’re going to break down a couple of the different areas that you’re going to want to look into when building out your fund dream team.
Roles
I’ve always preached that you’re going to need to cover three main areas to run your fund.
They are the following:
- Fund Management
- Capital Raising
- Expert Investor
So how are these roles defined in your fund setup you may ask? Read on.
First, the fund manager will typically be your CFO (Chief Financial Officer) and/or your CCO (Chief Compliance Officer).
These guys are ensure that everything in the fund is running smoothly.
They manage the different positions and maintain communication between investors and the fund as well.
As your fund grow the role of CCO becomes essential.
In fact any fund with over $150M AUM is going to have to have someone that is an expert in all things SEC to give potential investors the confidence they need to move forward.
Second, you’ll likely have to have a person that is a master with networking, pitching, and ultimately raising capital.
This is often the biggest road block for fund managers.
They have the deals, they have the knowledge, but they can’t seem to connect with the right people or groups.
Do not let your pride get the best of you here and invest in having someone in your corner who knows what to do to secure the cash necessary.
Third, you’ll need a CIO (Chief Investment Officer).
These are often the people starting the funds themselves. It’s a position that can be filled by multiple people, and eventually entire teams, to identify the most lucrative deals.
As you the need for highly qualified individuals in each of these sectors will increase, and surrendering some of your control or equity will pay dividends in the long run.
Boards and Committees
Now, this is perhaps down the road for most people just starting out, but having a board or investment committee will beef up your funds credibility.
A board of successful people is a tremendous resource for you as the fund manager, but don’t expect them to take an active role in the day-to-day operations.
Most board members will only join a handful of meetings throughout the course of the year, so make it count when you are working with them.
Having people with solid reputations standing in on your board boosts your own reputation exponentially.
It gives investors the confidence they need to commit and work with you.
Most investment committees will help solve the funds biggest problems by leveraging their own experience to find solutions.
Compensation
This is where the rubber meets the road.
Fund compensation can be tricky with SEC regulations, so be sure you’re verifying everything with your lawyer to make sure you’re complying.
Paying the different members involved in your organization also varies enormously based on the size and structure used.
However, here is what I have typically observed.
As funds start out equity financing is usually necessary.
With time the transition to more debt based finance is ideal, but don’t be afraid to surrender a little bit of equity to get you going.
For our three main areas of the fund the most flexible is that of the capital raiser.
If this position is being filled by someone who is purely raising money, then I’ve seen commission be as little as .5% of total money raised.
However, as a rule of thumb, compensation is divided into thirds; 1/3 for the fund manager, 1/3 for the fund raiser, and 1/3 for the CIO.
For committees the majority of compensation is usually tied to some sort of performance fee.
When the fund does well, so does the committee.
Something to bear in mind, is that equity positions do not have to remain the same forever.
In my fathers first fund they had 14 different partners.
As you can imagine the struggle to find the right balance of equity amongst them was not fun.
But they agreed to set benchmarks and reevaluate the performance on an annual basis, and readjust equity based on the results.
Conclusion
All in all, a well drafted team could make the difference between success and failure in your fund.
As you grow and develop I would highly recommend doing the due diligence to get the best qualified people to help you out.
Don’t be afraid to compensate them fairly, as it will pay dividends in the long run.
Take Care,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
