For a first-time fund/SPV sponsor there is usually no need to create separate management company and general partner entities with respect to funding and closing a deal, because the partnership will typically be composed of the officers and employees that will manage the fund.
However, there are some unique advantages of forming a separate management entity. They include:
- Structure Complexity: Facilitation of more complex investment structures where managers are responsible for different structures (non-partnership funds), client types (separately managed account or “SMA”), and specific sets of funds and SPVs. Flow’s fund documents assume a simple master-series partnership structure, with the fund as the general partner’s “client” for regulatory purposes.
- Delegation and Consolidation of Duties: Delegation of management to a specific entity with associated officers and employees separates the work and the liability from both the fund and the general partnership. The management entity can receive fees for its advisory or administrative services by contract with the fund. Excess management fees may also be consolidated across funds. Flow’s fund documents assume delegation of management responsibility to the general partner but can be adjusted to meet delegation of duty requirements.
- Registered Investment Advisers (“RIA”): RIAs often have numerous requirements performed by specialized parties, so separating these requirements from the sponsors is often important. Flow’s documents assume the fund sponsor/general partner/manager is or likely qualifies as an Exempt Reporting Adviser.
- Liability Segregation: Separation of investment advice and management responsibilities between the general partner and the limited partners. Fund sponsors also might act in different capacities as a general partner, whether as an adviser, investor, or manager would want to limit liability based on the type of role they are playing. As a general matter of separating liabilities across groups based on different functions is generally advisable. Flow’s documents treat limited partners as passive investors with no rights to take part in the advice or management of the fund absent some other agreement, as well as assume the general partner is playing the role of adviser and manager.
- Brand Value and Permanency: Fund sponsors often wish to separate brand and economic value attributed to the funds, their general partnership, and the management company. With Flow's structure, Managers are able to maintain their own brand and value separately from the ownership of any one fund.
- Foreign Regulations: Foreign fund structures often require the fund to be domiciled in distinct locations. The management company can and often is not domiciled in the same place for logistical, tax, and legal reasons.
While Flow’s template fund docs assume the general partner will be acting as the manager of each particular fund, the malleable language can be easily adjusted to specify the management company receive a management fee or shited with additional language to specify its role and responsibilities.
For most first-time fund sponsors of venture capital qualifying SPVs, there is no legal or regulatory requirement to have a management company. If you need specific consultation, we can connect you with one of our preferred legal partners to walk through any questions you may have with respect to entity or fund-related structuring.