How to wisely close a fund

Don't underestimate the time it takes to open the fund bank account, writes Scott Burns in this best practices guideline for closing a fund smoothly.

You have done the hard part. You spent tremendous time on the road meeting with investors and have spent time and financial resources working with legal advisers to draft the fund documentation. All that remains is to close the fund and then you can dedicate your time to building investor value.  

Studies show that the average time to final close has increased some 50 percent in the last six years to nearly 1.5 years in 2012. 

Following are some tips to make sure your closes goes smoothly and your investors have a great first experience.

STRATEGIC PLANNING 

To reduce investor frustration and make the subsequent close process as efficient as possible, make sure you spend time before the closes discussing logistics with your partners, service providers and investors. The following questions will help you form a more planned approach to the close process:

Question: How many closes do I anticipate and what is the estimated frequency?

Understanding the number and frequency of your closes will help you manage your cash flow and reduce administrative burdens and costs. The preparation of cash flow projections during the close period will provide important information to help manage subsequent closes. Investors coming in later in the close process may prefer more frequent closes so the amount of time for catch up interest is reduced. Investors entering the fund in the early closes may prefer fewer closes to reduce the administration required related to their fund investment.    

Question: Will the fund be returning a portion of prior capital calls received from previous close investors, or using the subsequent close to increase fund cash?

Depending on your cash flow needs, it may make life easier for your previous close investors if you can manage the process to avoid returning funds during the closes. This is accomplished by calling the subsequent close investors an amount equal to total percentage call amount paid by previously admitted investors. This decision must be weighed against other factors, such as possible negative impact on IRR and may be best made from a discussion with the larger investors.

EARLY PREPARATION 

Another step that will help ensure a smooth closing process is to prepare your subsequent close calculation template and the wording for your subsequent close investor letters early in the process.   Subsequent closes often involve multiple factors including capital call amount, management fee amount and catch up interest. Limited Partnership Agreements vary significantly on the mechanics involved with this calculation, so careful attention should be paid to understanding both the calculations and the flow of funds once received. The funds received by the fund from investors in a subsequent close will often need to be paid out to other investors and the manager. Limited Partnership Agreements and investor side letters can dictate the type of information required in the subsequent close investor letters, so it is important to prepare these templates in advance of the subsequent close(s). If you have any issues with practical application of the LPA provisions, this will give you time to reach out to your service providers in advance of the close.  

TIMELY INVESTOR DOCUMENTATION COLLECTION 

To help avoid delays in the close process, make sure you have asked for and collected all necessary documentation and information from incoming investors. This step is critical in ensuring compliance with the fund legal documents, relevant regulatory requirements and customer due diligence requirements. In addition, all necessary information should be received from the investors to allow full administration such as wire payment information necessary for subsequent close investor payments and investor contact information for receiving subsequent close investor notices.

OPEN A FUND BANK ACCOUNT EARLY 

One of the most common issues faced during a first close is the failure to complete the fund bank account opening process prior to sending out the first close call notice. Managers often underestimate the time it takes to open the fund bank account. In addition, banks often require an executed partnership agreement before they will finalize the account opening process. Starting the bank account opening process early and understanding the documentation process will help avoid unnecessary delays in the first call process.

YOUR FUND CLOSING CHECKLIST 

• Prepare cash flow forecast for subsequent close period
•  Prepare templates for first close call letters/calculations
• Review fund documents/side letters for subsequent close impact
•  Collect all necessary investor information/AML
•  Complete fund bank account opening process

Scott Burns is senior vice president of private equity at ISIS Fund Services, a private equity and hedge fund administration provider.