What Is a Private Fund?
A private fund is a pooled investment vehicle that raises money from a limited group of investors, rather than the public, and invests it under a stated strategy. It is usually organized as a limited partnership or LLC run by a general partner or manager. Because it sells securities, it must fit an exemption from registration, usually Regulation D, and it must avoid being regulated as a mutual fund through an Investment Company Act exclusion.
How a private fund works
A sponsor forms an entity, writes the rules for it and invites investors to contribute capital. The sponsor invests that capital in real estate, companies, loans or securities, and when the investments produce income or are sold, the entity distributes proceeds under a payout formula. Investors own interests in the fund and generally have no say in daily decisions. The sponsor typically earns a management fee and a share of profits above a hurdle.
Common types
| Type | What it invests in |
|---|---|
| Real estate fund | Apartments, commercial property, land or development, either a pool or specific assets |
| Private equity fund | Control or minority stakes in operating companies |
| Venture capital fund | Early-stage companies |
| Credit or lending fund | Loans, notes and other debt |
| Search fund and SPV | A single acquisition or deal, with investors pooled for that one purpose |
Why it is called private
A private fund does not offer its interests to the general public. It raises money in private placements to a limited group, typically accredited investors, using an exemption from registration. That is the legal meaning of private: not that it is secret, but that it is not a registered public offering. Most funds still have extensive disclosure to investors, because anti-fraud rules apply to every offering.
The two legal regimes
- Securities Act. Selling interests is a securities offering that must be registered or exempt. See Rule 506(b) vs 506(c).
- Investment Company Act. A pooled fund is generally regulated as an investment company unless it falls within an exclusion. See 3(c)(1) vs 3(c)(7).
- Advisers Act. The people managing the fund may be investment advisers. See exempt reporting advisers.
Before you start
Before raising money, decide on the strategy, target investors, minimum investment and how the sponsor is paid. Those choices determine the entity structure, the exemption and the documents. A partner attorney can map them out with you. See also real estate fund vs syndication.
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Book Free ConsultationFrequently asked questions
Is a private fund the same as a hedge fund?
A hedge fund is one type of private fund. Private funds also include real estate, private equity, venture and credit funds.
Who can invest in a private fund?
It depends on the exemption. Most funds accept only accredited investors, and some accept only qualified purchasers.
Do I need a lawyer to form a fund?
The securities and entity rules are technical, and mistakes can break an exemption, so most sponsors use securities counsel.
Can a private fund advertise?
Only under Rule 506(c), with verification of every investor. Under 506(b), general solicitation is not allowed.