Forming a Mini-Fund For Friends & Family to Co-Invest Through
I work for an investment and development shop and can participate on the LP side of our deals as much or as little as I'd like outside of my typical compensation structure, which includes a defined share of the GP entities.
The vast majority of my friends do not have the funds required to meet the minimum investment for most of what we do on their own, but, because I don't have to meet minimums and can invest really any amount I'd like, I'm thinking about setting up a mini fund through which my friends and family could invest in our deals in smaller increments. I'm undecided on whether or not I'd like to do it on a deal-by-deal basis or actually set up a fixed fund. Not really looking for any managerial compensation aside from a fee that would cover the operational costs of running the fund. The benefits to me would be the learning experience and to begin to build an investment track record at a relatively young age.
Have any of you guys ever done something similar? If so, do you have a particular structure that you'd recommend?
I am not a lawyer but it sounds like you should get one who specializes in securities. I suspect your firm is able to do business under regulation D. They likely have rules about their investors being "accredited". You would likely be bound by similar rules and who you sell to may impact them. I would clear with with your employer before doing it.
Are you trying to get your friends and family to co-invest without paying fee or carry or just create a vehicle (FoF) that would allow them to get over the minimum size and invest alongside other LPs? I would start by checking your fund documentation as it relates to co-investments. Generally speaking, there are heavy restrictions on the ability to co-invest without paying the usual management and performance fees. At my fund, I am limited to investing my own funds as well as my wife, that's it and I think that's pretty standard.
In either case OP would want to make sure their investors (whether getting a slice of GP or buying LP units) are accredited, right?
Not necessarily, you only need to be accredited if you invest directly, but it's not if you invest through an accredited vehicle (ie. a Fund of Fund or other structure). A corporation or partnership is considered an accredited investor as long as it has $5mm in assets so it's not hard to get around the issue. It's possible to get a smaller vehicle accredited, but I am not sure of the cost / complexity.
I would not be cool with that if you were working for me. Way too much liability.
You're going to run into Investment Company issues and you may have to register as an IA, there are signficant securities implications too if you're raising capital from non Reg D investors, Remember just because the securities are not registered with the SEC doesn't mean they don't have to abide by SEC rules. I ran into this a lot with EB5 capital raising but there we're protected both by Reg S and Reg D, but nonetheless the ICA issues were paramount to circumvent as it's expensive to register and be monitored as an RIA. Not saying you can't do it, but just ogtta be wary of those roadblocks. Also be prepared to get sued once/when some of your deals go south by your investors :)
Curious if your shop allows co-investment I would imagine you are going into their Entity so you would be putting money into Investment Co Employee LLC, I wonder if that helps circumvent any of the above issues. Like what if you just get money wired in by your dad. Is that typically fine? Not charging any fees or anything like that, just purely putting their money into the deal through my entity with maybe even a handshake agreement to pay them back.
You'll need to consult a securities attorney, but there are exemptions to the accreditation requirement. One example its the Invest Georgia Program. I suspect other states have similar programs.
https://sos.ga.gov/index.php/securities/invest_georgia_exemption
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