The global funds sector is experiencing an interesting expansion that's increasing the diversity of funds on offer as well as the size. Well-established fund managers are continuing to grow and launch larger and larger funds, while there has also been a steady flow of first-time, spin-off and emerging managers setting up their own firms.
This new wave of fund managers has been partly driven by investor demand for the niche, tactical, added-value investment opportunities that the larger funds may pass over or simply not be aware of. The opportunities and rewards for both approaches continue to fuel interest and demand and there's therefore a need to make sure that emerging fund managers get it right first time.
As at September 2017, there were more than 590 first-time or spin-off venture capital fund managers raising capital worldwide, up from 470 in 2016. More than 31% of the venture capital funds that reached a final close in 2017 were first-time funds, compared to 25% in 2016. One of the key drivers of this growth was performance as, when comparing the returns generated by 2006-2014 vintage venture capital funds, first-time managers generally outperformed the pool of experienced venture capital managers.
The Netherlands is not traditionally seen as a jurisdiction to domicile funds however, it's well suited for new managers. The Netherlands is, for example, experiencing a substantial increase of registered small managers falling under the registration regime of AIFMD. In addition, the Netherlands continues to have a strong, dedicated service industry that is cost-efficient for emerging fund managers as well as a stable legal environment.
Emerging fund managers need to consider the following key areas when setting up their first fund:
- Fund structuring
The basis of a successful fund is an appropriate structure which requires a sophisticated understanding and analysis of the options. It's important for emerging managers to consult legal advisers at an early stage to determine what issues may impact on the structure of the fund.
Fundraising can be a very time-consuming process so it's important not to underestimate this alongside the effort and cost involved.
- Fund administration
Having the right day-to-day administrative processes, procedures and infrastructure in place is something that many emerging fund managers do not consider as much as other aspects of launching a fund, which can be a crucial oversight. With regard to administration, having a range of related services underpinning the fund can considerably help minimise the risks and maximise success. One strategy frequently adopted by emerging fund managers is to outsource the administration to a trusted third party.
- Fund financing
Emerging fund managers need to consider whether they will need to use any financial products as part of their strategy and which provider would be best placed to provide these. It's not just the financing itself that needs qualifying, but also the range of other financial considerations such as insurance and escrow banking solutions. The financial aspects of running a fund are significant and working with the right partners can help simplify this aspect and free up managers to focus on running a fund.
- Fund governance
Investors are increasingly requiring independent oversight of the affairs of their funds, which has driven an increased demand for directors unaffiliated with the manager on private equity and real estate funds. The diversity of directors' skills and experience is of utmost importance.
The Netherlands, with its established regulatory regime and local funds experts, can offer emerging fund managers the foundation to set up funds in an efficient and cost-effective way. This allows managers to concentrate on the business of managing portfolios and selecting assets.
The route to launching a new fund for a new manager can be challenging. Many emerging fund managers will likely be proven in their field and have a good degree of relevant experience and insight. The Netherlands as a jurisdiction to domicile a fund can provide comfort from concept to launch, to the on-going operations of the fund, through expert advisers and quality service providers.In response to the increased market interest in this next generation of managers, we've produced an Emerging Fund Manager guide, designed to address and highlight some of the challenges new managers face in navigating the complexities of establishing a successful fund. To read the introduction of the guide and for more information, click here. To receive a copy of the full guide, please get in touch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.