High net worth (HNW) individuals, wealthy families and family offices are increasingly turning to private fund structures to hold their investments.
According to provider of wealth and fund services Zedra, this is mostly due to a greater degree of flexibility that these vehicles provide compared with traditional hedge or private equity funds, which many HNW investors are in need of.
Private funds can be used to pool other funds so that investors can gain access to an asset class that would otherwise not be available to them as individuals.
They can also be more cost effective, since several investors would share the fund’s costs instead of creating each their own; alongside greater tax benefits than more standard structures, Zedra said.
Mark Cleary, director at Zedra Fund Services, said: “Private funds are also attractive for co-investment ‘club’ type deals, with several investors coming together to seek opportunities jointly. Investors may know each other and decided to set up a private fund together; alternatively, they may be known to the fund manager and brought onboard through this connection.
“Wealthy families who are well acquainted and have similar investment goals could also choose to enter into a private fund together, for example.”
Set up
A private fund is usually run by a fund manager who typically markets it and makes the investment decisions.
They can be set up as different entities, according to what is allowed by the local regulator, but are most commonly structured as a company or a limited partnership.
Fund managers then usually appoint an administrator to provide back-office support, which includes handling fund and investor compliance, KYC and AML requirements, and keeping detailed investor records and corporate secretarial work for the entity.
Typically, private funds will have fewer investors than a larger retail fund, but to be successful, regulatory compliance is paramount. That is why managers often have a local, professional partner that is familiar with domestic rules to provide support and guidance.
Among the most popular jurisdictions to set up private funds are the Channel Islands, especially for managers based in Europe or the Middle East, as it is easy for them to travel there and there isn’t a significant time difference, Cleary said.
Additionally, Singapore and the Caymans are also popular among managers and clients in Asia, the US or Latin America.
