Learn to navigate evolving rules, compliance duties and pricing to build private equity funds. Master legal essentials, fees and tax efficiencies.
This article is part of The Complete Guide to Raising Funds from LPs. The guide covers everything from defining your investment thesis and building strategic fundraising plans to mastering investor due diligence and navigating emerging trends like AI and ESG integration.
Each chapter builds on the previous ones to give you a complete fundraising playbook. While the article below is very informative, you’ll get the most value by reading the entire guide to see how you can fast-track your fundraising process.
Your fund’s legal, compliance, and pricing foundations are not merely technical considerations to be delegated entirely to counsel. They represent strategic decisions with profound implications for investor appeal, operational flexibility and, ultimately, your fund’s viability.
The regulatory environment governing private funds is in a constant state of flux, driven by market developments, technological advancements, and shifts in policy priorities. Fund managers must therefore maintain a vigilant and proactive approach to compliance, understanding that today’s best practices may be tomorrow’s minimum requirements.
In August 2023, the Securities and Exchange Commission (SEC) in the US adopted significant new private fund rules under the Investment Advisers Act of 1940, creating the most substantial regulatory changes for the industry in over a decade. These rules impose expanded disclosure requirements, restrict certain activities, and mandate additional operational safeguards for fund advisers.
The new requirements include mandatory quarterly statements detailing fund performance, fees, and expenses, with different reporting standards for liquid versus illiquid funds. For private equity funds specifically, the rules require presentation of metrics such as IRR (Internal Rate of Return), MOIC (Multiple on Invested Capital), and detailed information on contributions and distributions. Additional provisions mandate disclosure of preferential treatment previously handled through side letters, annual fund audits, and fairness opinions for adviser-led secondary transactions.
While legal challenges to these rules are ongoing, fund managers should proactively prepare for implementation rather than adopting a wait-and-see approach. The increased compliance burden will particularly impact smaller funds with limited resources, potentially creating competitive advantages for larger, more established managers.
Understanding the registration framework for fund advisers remains essential for structuring your fund appropriately. Under the Advisers Act, investment advisers to private equity funds must generally register with the SEC unless they qualify for specific exemptions:
Advisers relying on the first two exemptions are considered “exempt reporting advisers” (ERAs) and must still file portions of Form ADV with the SEC, disclose basic information about their activities, and remain subject to certain anti-fraud provisions and examinations.
Registered investment advisers face more comprehensive obligations, including fiduciary duties to clients, implementing compliance programs, maintaining books and records, and filing Form PF for advisers with over $150 million in assets under management. The form provides regulatory authorities with information about fund size, leverage, liquidity, and investor composition, though this information is not made public.
Beyond formal regulatory requirements, fund managers must also address emerging risk priorities that increasingly influence investor due diligence and regulatory scrutiny:
Addressing these priorities requires not just technical compliance but proactive risk management that reassures investors and positions your fund favorably in an increasingly scrutinized market.
The various types of fund structures are outlined in chapter 2. While selecting one, you must ensure that your fund’s legal structure facilitates your strategy while meeting investor expectations and regulatory requirements. While closed-end limited partnerships remain the industry standard for most buyout and growth strategies, alternative structures may offer advantages for specialized approaches.
There are critical regulatory considerations to take note of when you make this selection, particularly under U.S. securities laws. Fund managers must choose appropriate exemptions for offering their securities and for avoiding registration as an investment company:
Beyond the basic legal entity choice, fund terms and governance provisions significantly impact both investor appeal and operational flexibility:
These terms must be carefully calibrated to create a balanced partnership between you and your investors. Overly restrictive terms can hamper execution, while insufficient protections will deter sophisticated investors.
Tax efficiency remains a crucial element of fund structuring that directly impacts investor returns and capital attraction. Take note of the following tax considerations:
Effective tax planning requires close collaboration between fund counsel, tax advisors, and the management team, with structures typically tailored to accommodate the specific needs of different investor categories.
Attracting limited partners and ensuring sustainable operations for the general partner hinges on cleverly designed fund economics. Crucially, contemporary fee structures, carried interest mechanisms, and rigorous transparency in expense management foster strong, enduring investor relationships.
While the traditional “2 and 20” model (2% management fee and 20% carried interest) remains a reference point, private equity fee structures have evolved considerably to reflect changing market dynamics and investor preferences.
Recent data from Callan’s 2024 Private Equity Fees and Terms Study, which analyzed 413 partnerships from 2018-2024, found that management fees during the investment period ranged from 1.5% to 2% for most funds, with larger funds often charging lower percentages on a sliding scale. Despite pressure for fee reduction, the study noted that “unlike trends observed in other asset classes (namely the public markets), private equity fees have not come down over time. Most private equity managers are not inclined to change their fees from one fund to the next, leading to relative stability in fees.”
The study also revealed that the vast majority of funds (84%) maintained an 8% preferred return hurdle rate, calculated on a compounded basis, before general partners (GP) could receive carried interest. Nearly all funds included in the study used a 20% carried interest rate, though variations exist across strategies and fund sizes.
Interestingly, recent research has also highlighted fee variation within individual funds. According to a study published in the Journal of Finance, management fees and carried interest can vary by approximately 91 basis points and 5.8% on average across different investor tiers within the same fund. This variation is substantially lower in venture capital funds compared to other private capital strategies.
Management fees serve as the economic foundation for your firm’s operations and represent a critical consideration in fund structuring. There are some common strategic approaches you can explore when determining management fees:
The management fee approach must balance providing adequate resources for high-quality fund operations with investor sensitivity to fixed costs that reduce returns.
Carried interest represents the primary performance incentive and alignment mechanism between managers and investors. When thinking about carried interest structures, consider the following:
These carried interest structures must carefully balance providing compelling incentives for the investment team with appropriate investor protections and returns.
The allocation of expenses between the management company and the fund has gained increased scrutiny from both investors and regulators. Here are some best practices worth following:
The legal and compliance documents underpinning your fund serve to protect both general and limited partners while defining the investment framework. Aim for precision in their drafting, as they are critical in meeting regulatory requirements and instilling investor confidence.
The Private Placement Memorandum (PPM) serves as the primary disclosure document for potential investors and must be crafted to balance comprehensive information with strategic positioning.
The PPM should include disclosure of a few key aspects. It should provide thorough disclosure of material risks specific to your strategy, structure, and market conditions, while avoiding generic language that fails to meaningfully inform investors. It should present track record information in accordance with regulatory standards and industry best practices, with appropriate disclaimers and methodology explanations.
PPM disclosure should also clearly describe the investment approach in a manner consistent with your thesis while maintaining sufficient flexibility for execution across market conditions. Highlighting relevant experience and accomplishments of key team members is also important and so is a detailing of all aspects of the economic relationship between the fund, the manager, and investors with transparent explanations of calculation methodologies.
The PPM’s quality and completeness directly impact investor confidence and compliance positioning. While legal counsel will drive much of the drafting process, the management team must ensure the document accurately reflects their vision and capabilities. You will find more in-depth information and tips on how to go about crafting the various components of the PPM in Chapter 4.
As the legally binding contract between the GPs and LPs, the Limited Partnership Agreement (LPA) requires careful attention to both standard provisions and customized terms that reflect your strategy.
It should define management fees and economic terms precisely, along with carried interest calculations, expense allocations, and distribution waterfalls in legally enforceable language.
The LPA document is also where you establish governance rights, with clear parameters for investor involvement through the Limited Partner Advisory Committee (LPAC), including scope of authority, voting procedures, and conflict resolution mechanisms.
You will also have to document investment guidelines such as concentration limits, permitted investment types, leverage restrictions, and other parameters that define the fund’s operations.
Default provisions should outline consequences for investors who fail to meet capital calls, balancing deterrence with practical remedies. And last but not the least, this document should also specify reporting commitments, where you define the nature and frequency of financial reports, portfolio updates, and other information to be provided to investors.
Think of the LPA serving as a fair framework that protects legitimate interests of all parties rather than an adversarial document. Working with experienced fund formation counsel who understand market standards is essential for creating an agreement that will withstand investor scrutiny while providing operational clarity.
Subscription materials are documents that facilitate the investor onboarding process while ensuring regulatory compliance. To prepare these, keep the following key points in mind:
Well-designed subscription materials balance thorough diligence with investor convenience, creating a positive first experience with your fund’s operations.
The legal, compliance, and economic foundations of your fund are not mere technical details; they represent strategic decisions that directly impact fundraising success, operational efficiency, and ultimately, investor returns. As regulatory requirements continue to expand and investor expectations for transparency and alignment increase, excellence in these structural elements has become a competitive differentiator.
By approaching legal, compliance, and pricing decisions with strategic intent rather than viewing them as administrative hurdles, you position your fund for sustainable success in an increasingly competitive and scrutinized market. The investment in getting these elements right from the beginning pays dividends throughout your fund’s lifecycle, from initial fundraising through final distributions.
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