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Starting a (Family) Investment Partnership


jay21
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I have the opportunity to begin a family investing partnership and was wondering what advice the board could give me.  I am primarily concerned with the operational tasks I would need to worry about.  How do I handle redemptions and additional subscriptions?  Would I have to transfer funds from my family's brokerage account to the "partnership's" brokerage account?  If a family member wants me to invest money in their retirement accounts, how could I do that?  How difficult would filing taxes be for both myself and my family members?

 

Any information or reading suggestions would be greatly appreciated.

 

Also, I would like to hear any general advice.  I am sure there are some cautionary tales regarding managing family money that I could learn from.  Also, any suggestions on fee structures and alignment of incentives would be appreciated.  Thanks!

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1. Taxes - you will need to issue a K-1 for each LP...  the only issue I think of  with tax exempt accounts investing in the LP would be UBTI generation

 

2. Are you starting a Family LP or just an LP? I think of a Fam LP as an estate planning tool. 

 

3. The funds will be wired to the partnership's brokerage account and each limited partner will then own x% of the LP

 

4. My firm is SEC registered and the GP of an LP, so we are required to get an annual audit, but I don't think you will have to. Check, bc audits are not cheap

 

5. Additions and redemptions - lots of thoughts here. (1) redemption terms need to match up with your investment horizon... nothing sucks more than having to liquidate a position where the thesis has not played out... if you are just doing equities probably quarterly with 30 to 45 days notice  (2) the less frequent your flows are (redemptions & additions) the easier it will be for you to administer the fund... assuming you self administer. Also, you need to give a lot of thought to how you are going to administer the fund. Depending upon the fee schedule you use and the addition/redemption frequency this can get complicated.

 

If you have specific questions let me know and I will ask our back office guys anything you want

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many things to consider:

 

-GP of the partnership is typically an LLC owned by the managing individual, so you will need to set this up separately. 

-subscription documents, partnership agreement, and PPM all need to be drafted.

-taxes - K1 will need to be issued for each partner as Cunninghamew said.  Your partnership will need to file taxes as well.

-Audits are not necessarily required; but you better have this disclosed in your partnership agreement and PPM if you are not planning on getting audits.

-you will need to file form D with the SEC within the correct timeframe of offering, and renew at relevant points.

-depending on your situation, you may need to register your LLC as an investment advisor.

-most funds typically have venders each fill separate roles...admin, custodian, primebroker, etc.  you should outline what your intents / limitations are within your documents you draft. 

 

I had a partnership I ran for family for a bit and then had to close due to conflict of interest.  I still manage separate accounts though.  I can tell you from experience that running separate accounts can be a lot easier from an administrative standpoint.  All you really need is a PoA for that...you can have other docs in place too such as a advisor agreement, but there is much less involved from a regulatory standpoint. 

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  • 4 years later...

many things to consider:

 

-GP of the partnership is typically an LLC owned by the managing individual, so you will need to set this up separately. 

-subscription documents, partnership agreement, and PPM all need to be drafted.

-taxes - K1 will need to be issued for each partner as Cunninghamew said.  Your partnership will need to file taxes as well.

-Audits are not necessarily required; but you better have this disclosed in your partnership agreement and PPM if you are not planning on getting audits.

-you will need to file form D with the SEC within the correct timeframe of offering, and renew at relevant points.

-depending on your situation, you may need to register your LLC as an investment advisor.

-most funds typically have venders each fill separate roles...admin, custodian, primebroker, etc.  you should outline what your intents / limitations are within your documents you draft. 

 

I had a partnership I ran for family for a bit and then had to close due to conflict of interest.  I still manage separate accounts though.  I can tell you from experience that running separate accounts can be a lot easier from an administrative standpoint.  All you really need is a PoA for that...you can have other docs in place too such as a advisor agreement, but there is much less involved from a regulatory standpoint.

 

Does anyone have an estimate of costs for starting a partnership?

 

Also, can you have incentive based fees for SMAs?

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If you start a partnership (hedge fund), I think the costs are usually $20,000-$30,000 and then $20,000 a year after that (this is for auditing, compliance etc). From my understanding that's pretty close to the minimum.

 

You can charge performance fees on an SMA if you're an RIA. I believe the client has to have a minimum net worth of $2.1 million (instead of a $1 million for a hedge fund). Anyone can feel free to correct me on that though.

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If you start a partnership (hedge fund), I think the costs are usually $20,000-$30,000 and then $20,000 a year after that (this is for auditing, compliance etc). From my understanding that's pretty close to the minimum.

 

You can charge performance fees on an SMA if you're an RIA. I believe the client has to have a minimum net worth of $2.1 million (instead of a $1 million for a hedge fund). Anyone can feel free to correct me on that though.

 

Thanks Paul

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Minimum net worth requirements in order to charge incentive fees are the same for SMA's and hedge funds.  Both are the higher amount. 

 

My fund's annual admin, tax, and audit runs about 23k annually.  The expense is shared by all partners, GP included.

 

I found SMAs less sticky.  The client questions everything, especially positions that go down. 

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