Business
Building a Scalable Closed-End Fund Business
Published by Jessica Weisman-Pitts
Posted on February 11, 2025
5 min readLast updated: February 12, 2025
Global Banking & Finance Review®
Company
Published by Jessica Weisman-Pitts
Posted on February 11, 2025
5 min readLast updated: February 12, 2025
By Joseph Morrissey and Theo Kaminski, Seward & Kissel LLP
New portfolio managers that enter the closed end private fund space encounter various headwinds that have recently permeated the industry. Accordingly, rather than chasing long-term ambitions, many new portfolio managers choose to pursue short-term strategies that allow them to: (1) build a track record, (2) keep costs down and (3) scale their business when their access to fundraising opportunities improves.
Track Record Considerations
New portfolio managers often seek to enter the closed end private fund space on their own after starting out with another established portfolio manager. Ideally, a new portfolio manager could market to prospective investors, including highly sought-after sources of seed capital, the investment track record that the new portfolio manager developed during time spent working with another portfolio manager. New portfolio managers should, however, be wary of potential regulatory, contractual and intellectual property issues that come with marketing an investment track record. Considerations include:
Structuring Considerations
Given the obstacles to porting a prior investment track record developed at a prior firm, new portfolio managers may wish to develop a new investment track record to kickstart their business. As with any startup business, cost effectiveness in building the infrastructure to pursue investment opportunities is a key consideration. Two attractive options, described below, allow new portfolio managers to offer investment products to investors in a manner that, over time, is increasingly cost effective and cost efficient and reduces lead time to launch, particularly if investors may participate in investment opportunities on the same or substantially similar terms. In addition, rather than soliciting investors for participation in a blind pool, both options offer investors transparency regarding the portfolio investments. To establish a track record, new portfolio managers may create:
Conclusion
It is important to be strategic and diligent in building and marketing a track record. A lack of careful attention to the various considerations may result in severe consequences and delays in scaling a business. With the right strategy and tools, new portfolio managers can mitigate significant risks in launching an investment advisory business.
Joseph Morrissey is a partner in the Investment Management Group at Seward & Kissel LLP. He works with sponsors and managers of various private investment funds and other pooled investment vehicles, including private equity funds, hedge funds, funds of funds, commodity pools, and various “hybrid” funds. In particular, he focuses on fund formation and structuring, the offering of interests by private investment funds, and the negotiation and documentation of such investments.
Theo Kaminski is an associate in the Investment Management Group at Seward & Kissel LLP. He advises investment managers of hedge funds, private equity funds and commodity pools, and regularly advises clients on private fund formation, structuring and regulatory and compliance matters.
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