Private funds are collective investment schemes, formed by investment professionals (called fund managers), who seek to raise capital to make multiple investments in a specified industry sector or geographic region.
These funds are marketed to qualified or professional investors – mostly High Net Worth Individuals, family offices and institutions.
Private funds are essentially “blind pools”. Passive qualified investors make commitments to invest a certain amount of capital over time, as per the fund’s commitment schedule, entrusting the fund manager to source, acquire, manage and exit the fund’s investments over a set period of time.
Some VC funds can also be setup to invest on a “deal-by-deal” basis. In these cases, the Fund Manager solicits investments from a pool of potentials, for each specific deal that they source. Multiple investors can invest in multiple deals, and there can be some deals that have no common investors.
Such structures are usually seen in very small VC Funds and can get cumbersome to manage once the number of deals increases.
What’s in it for the fund manager, and for the investors?
Fund Managers earn management fees and performance fees for services thus rendered, and investors get the opportunity to earn higher rates of return on their invested capital. Selection of the portfolio of investments of the fund is through an investment committee, that comprises experts in the target geographies and sectors of the fund, and access to such expertise is also one of the key decision factors for investors.
Ok. So what is a VC fund?
Generally speaking, Venture Capital funds make early-stage investments, often within the first five years of a company’s operations. Technology companies grow fast and exponentially, and so the VC-stage of investments comes in as early as months in some cases.
Some growth-stage Venture Capital funds invest in later stage, pre-IPO companies, although this is usually the time when larger Private Equity players and investment banks enter the life-cycle of investments.
There are the occasional buyout funds that acquire controlling interests in companies with an eye toward later selling them or taking them to the IPO stage. We have seen more venture capital funds actively taking part in the management of these companies, as opposed to merely making investments. This helps them leverage their expertise in the particular sector or geography, while also ensuring greater control on the direction of the company, and thus managing risks more closely.
Some VC-funds are distressed funds that invest in financially distressed companies at a large discount, and then use their expertise or resident entrepreneurs to turn these companies around.
The structure of a venture-capital fund generally involves several key entities, as follows:
VC fund Structure:
A simple structure for a VC Fund includes:
The Investment Fund: – this is the vehicle into which investors make investments, and the assets of this vehicle are managed by the VC fund manager, under an Investment Management Agreement. This is usually a closed-ended vehicle, as per the requirements of the regulators in the UAE.
The Fund Manager: – this is the entity that manages the Investment Fund. It usually signs an agreement with the fund to provide its services. The Fund Manager is an operational entity that employs staff such as investment analysts who assess potential opportunities. The Fund Manager is helmed by a Senior Executive Officer, or SEO, who has extensive fund management experience, and is overseen by an experienced Board of Directors.
Other related fund entities and vehicles may be formed to account for certain regulatory, tax and other structuring needs of one or more groups of investors.
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To know More About VC Fund Formation In The UAE, Read the below article: https://10leaves.ae/publications/difc/vc-fund-formation-in-the-uae-vc-fund-formation-introduction