Fund Operations: Essential Processes, Best Practices & FAQs
Fund operations are the backbone of venture capital (VC) and private equity (PE) management, covering everything from capital calls and LP management to fund expenses and compliance. A well-structured operational framework ensures smooth fund performance, regulatory compliance, and strong LP relationships.
This guide provides a comprehensive overview of fund operations, detailing best practices, key processes, and an in-depth FAQ section to help fund managers navigate complex operational challenges.
1. Key Components of Fund Operations
Fund operations encompass all the logistical, legal, and financial activities required to run a VC or PE fund. The primary areas include:
A. Fund Formation & Legal Structure
Jurisdiction & Incorporation: Most US-based VC funds incorporate in Delaware due to its favorable legal environment.
Limited Partnership Agreement (LPA): Defines fund terms, GP and LP responsibilities, fee structures, and exit conditions.
Regulatory Compliance: SEC regulations, tax obligations, and KYC/AML requirements must be addressed early.
B. Capital Calls & Investor Contributions
Capital Calls: GPs issue capital calls to LPs when needed, typically over a 3-4 year investment period.
Investor Payment Schedules: LPs contribute their committed capital in tranches rather than upfront lump sums.
C. Fund Administration & Back Office
Fund Accounting: Tracks investments, expenses, and distributions.
Investor Reporting: Provides LPs with performance updates, financial statements, and valuation reports.
Regulatory Filings: Ensures SEC, IRS, and local compliance.
D. Investment Process & Deal Management
Deal Sourcing & Due Diligence: Identifies investment opportunities and conducts risk assessments.
Portfolio Management: Monitors investments, provides support, and plans exits.
Valuation Policies: Establishes guidelines for pricing and performance tracking.
E. Management Fees & Carried Interest
Management Fees: Typically 2% of AUM, covering fund operations.
Carried Interest (Carry): Usually 20% of profits, distributed after LPs receive their principal investment back.
F. Distributions & Exits
Distribution Waterfall: Prioritizes how profits are allocated between LPs and GPs.
Exit Strategies: Includes IPOs, secondary sales, and mergers & acquisitions.
2. Best Practices for Efficient Fund Operations
1. Automate Fund Administration
Use fund administration platforms like Decile Hub, Carta, or AngelList to handle back-office tasks efficiently.
2. Set Clear Capital Call Schedules
Avoid calling capital too early (causes LP friction).
Space out calls over 3-4 years to maintain financial flexibility.
3. Maintain Strong Investor Relations
Provide quarterly performance reports with clear data.
Conduct annual LP meetings to maintain transparency.
4. Optimize Expense Management
Limit fund expenses to 10-15% of management fees.
Outsource fund administration to reduce overhead costs.
5. Ensure Compliance & Legal Readiness
Register correctly (Delaware LLC for US funds).
Maintain proper SEC/IRS filings.
Conduct annual audits (if required by LPs).
3. Frequently Asked Questions (FAQs)
Q1: What is the best jurisdiction for setting up a VC fund?
Most funds incorporate in Delaware (US) due to its cost-effectiveness, tax benefits, and strong investor confidence.
Q2: How often should a VC fund make capital calls?
Most funds call 20-25% of committed capital upon first close.
Capital calls are then spaced out over 3-4 years, depending on fund needs.
Q3: What happens if an LP defaults on a capital call?
The LPA dictates potential penalties, which can include:
Interest charges (e.g., 12% per year).
Forfeiture of LP stake.
Selling the LP’s interest at a discount.
Legal action (as a last resort).
Q4: What’s the difference between fund administration and back office?
Fund Administration: Covers accounting, investor reporting, and regulatory filings.
Back Office: Includes treasury management, investment reviews, compliance, and software integration.
Q5: Can LPs invest using a self-directed IRA?
Yes, but:
The fund and LP must use the same trust company as a custodian.
Large institutions (e.g., Chase, Schwab) often do not support this.
Decile Partners recommends Strata Trust for IRA investments in VC funds.
Q6: Can a GP make personal angel investments alongside their fund?
Yes, but:
It must be disclosed to the LPAC (Limited Partner Advisory Committee).
It could be considered a conflict of interest.
Q7: How are management fees distributed between the Management Company and General Partner?
Management Fees are collected by the Management Company (ManCo).
ManCo then pays the GPs to manage fund operations.
Q8: Can LPs pass ownership of their fund interest to heirs?
Yes, but:
It depends on the LP’s estate planning and legal setup.
The LPA is usually silent on inheritance specifics.
Q9: How are non-liquid assets handled at fund closure?
If a fund has illiquid holdings at the end of its life, options include:
Extending the fund life (1-2 years).
Distributing remaining interest to LPs.
Selling non-liquid assets via secondary markets.
Q10: How do funds handle missed investment opportunities?
If a GP had access to strong deals but lacked capital, they may include a "Missed Deals" slide in investor updates.
Q11: What are the best banks for European GPs with Luxembourg entities?
Common banks include:
HSBC
Bank Frick (Liechtenstein)
Q12: What happens if an LP does not fulfill a capital call?
Most funds sell the LP’s interest at a 50% discount or find a replacement LP.
Some funds may pursue legal action, but this is rare.
Q13: What’s the difference between a Venture Partner and an Advisor?
Venture Partner: Works actively on deals and gets carry.
Advisor: Provides strategic advice with lower carry or equity incentives.
Q14: What’s the best tech stack for fund operations?
A VC Tech Stack should include:
Fund Admin: Decile Hub, AngelList, Carta.
CRM: Affinity, Salesforce.
Back Office: Zapier integrations, compliance tools.
Q15: Should a fund offer shorter terms if LPs ask for it?
No, venture funds typically run for 10 years with two 1-year extensions.
LPs asking for shorter terms may not understand VC investing.
Final Thoughts
Fund operations require a combination of efficient processes, strict compliance, and strong investor relations. By automating fund administration, optimizing capital call strategies, and maintaining transparency with LPs, fund managers can build a high-performing and sustainable investment vehicle.