INTRODUCTION

An investment fund is a supply of capital belonging to multiple investors used to purchase securities or real assets, while allowing each investor to maintain ownership and control over his own share.

Generally, investors invest in funds for three reasons:

1. Access to investment opportunities not otherwise available;
2. Greater expertise (as the fund is often managed by an experienced fund manager); and
3. Lower investment fees than they might obtain on their own.

While a Funds practice occasionally covers both the ‘upstream’ fund formation and establishment work, as well as the ‘downstream’ investment into portfolio companies, this article focuses on the former, given that the latter broadly resembles M&A work. The key parties involved in a fund formation matter are the Limited Partners (the passive investors contributing capital to the fund) and the General Partner (often an affiliate of the Fund Manager, who administers and manages the fund and its investments, and collects management and performance fees).

SUB-AREAS

• Funds can generally be split into two categories – Open-ended and Close-ended. An Open-ended Fund refers to a fund where an investor has the flexibility to increase or reduce their stakes in the fund, typically at the price fixed based on the fund’s Net Asset Value (“NAV”) for that day. While investors may trade the shares with each other, the fund itself can also repurchase and issue the shares. There is no limit to the number of shares it can issue, provided there is continued interest from investors. Mutual funds, hedge funds and ETFs are common examples of open-ended funds. On the other hand, a Closed-ended Fund only issues a fixed number of shares through a fundraising exercise and cannot continuously take on additional amount of capital (unless via an authorised corporate action). Investors will sell or buy shares with each other in the secondary market and the price of a share would be determined by market supply and demand. Thus, the shares may trade at a discount or premium to the fund’s NAV.
• Another way to categorise funds is to split them into Retail and Private Funds. Retail Funds refer to funds where its investors are often non-professional retail investors, whereas Private Funds often refer to funds where its investors are often sophisticated investors, such as institutional or accredited investors including pension funds, family offices, sovereign wealth funds, endowments etc. This difference is crucial, as securities involving retail investors are more heavily regulated and would therefore require more documentation and regulatory compliance. Thus, Private Funds work is often more flexible and dynamic, whereas Retail Funds work is often closer to that done in the Capital Markets department.
• One common example of a retail fund is a Mutual Fund, which is managed by professional money managers and is structured and maintained to match the investment objectives stated in its prospectus. A Mutual Fund can be further divided into various categories, but the common ones include Equity Funds (investing principally in stocks), Fixed-Income Funds (investing mostly on securities with a set rate of return, such as bonds) and Index Funds (a fund that mirrors major market index such as the Straits Times Index).
• Some common examples of Private Funds are Hedge Funds, Private Equity (“PE”) Funds, and Venture Capital (“VC”) Funds. A Hedge Fund typically describes a fund that relies on a range of strategies, instruments and/or asset classes to make a positive return on investment in both rising and falling markets. PE Funds tend to seek to acquire a majority stake in a private company (often, combining its funds with additional debt borrowed from banks) via a Leveraged Buyout and exercise some management and operational control over it, with a view to selling it on for a profit within 5 years. In contrast, VC funds manage the money of investors who seek stakes in early-stage startups that have high-growth potential and will hopefully deliver outsized returns. Given a start-up’s high risk of failure, the stake sizes will be smaller compared to the average investment size made by a PE Fund.

WHAT YOU CAN EXPECT

• Fund formation work includes advising the General Partner(s) and Fund Manager(s) on:

1. Tax liabilities and structuring of the cross-border fund in a tax-optimised manner;
2. Regulatory filings and requirements for marketing securities in each country where the investors are from;
3. Obtaining the necessary licenses and clearances in the country the fund manager operates from; and
4. Negotiating investment terms with individual investors.

• Generally, you can expect to prepare four categories of documents:

1. Formation Documents — documents that establish the formation of the fund such as the Limited Partnership Agreement (“LPA”);
2. Offering Documents — marketing documents for the fund which include the Private Placement Memorandum (for private funds), or the Prospectus (for retail funds). These set out the investment strategy and scope, minimum investor requirements, risk factors, track record of the investment manager, etc.;
3. Internal Documents — agreements governing the rights of the founders of the fund or the Investment Management Agreement between the fund and the fund manager; and
4. Regulatory Filings — mandatory submissions of documents and information to government agencies to ensure compliance with legal and regulatory requirements.

Additionally, for private funds, you may also be required to negotiate a Side Letter with investors who are asking for specific rights for themselves.

• You will be expected to advise on the jurisdiction and the fund structure that should be used, which is often driven by tax considerations. There are four types of fund structures available in Singapore:

1. Limited Partnerships
2. Singapore Variable Capital Companies (“VCC”)
3. Private Limited Companies
4. Unit Trusts

• Though each of these structures have their own strengths and limitations, the Limited Partnership is often the preferred structure – which explains why the fund manager is frequently called the General Partner while the investors are called Limited Partners. Alternatively, after the Variable Capital Companies Act 2018 was passed, funds may now be structured as a VCC, which would allow sub-funds to be created with segregated assets and liabilities within the VCC. These sub-funds have the added benefits of being able to be wound up individually and to be exempt from capital maintenance rules, allowing free redemption of shares and payment of dividends from capital.
• With regard to regulatory work, you will have to ensure that the fund manager either holds a Capital Markets Services License for the regulated activity of fund management or is a Registered Fund Management Company with the Monetary Authority of Singapore, and guide the fund manager on the necessary requirements (e.g. the qualifications and experience of the directors, the minimum base capital, reporting requirements etc.) as well as the periodic changes to regulatory and compliance issues.
• You may also be expected to prepare documents for fund financing when funds borrow from banks. This may include assisting the banks in due diligence exercises, which would require you to give private disclosures to the banks regarding beneficial ownership of the limited partners.
• Apart from representing the fund, lawyers may also represent investors that are investing in the fund. This would often require lawyers to review if the terms provided by the fund in the LPA are in accordance with ordinary market practice. In the context of private funds, this would further include negotiating Side Letters, which contain clauses that provide rights for the specific investor beyond what is generally available to all investors in the LPA.