Fund Support

Audit & Accounting | By Karen H. Kerby & Robert Crowley | Jun 20, 2019

How can Prager Metis help new managers when they are in the pre-launch stage?

We can help in a number of ways. We would work closely with their attorneys to determine what the fund structure should look like. The structure is going to be driven by the types of investors. Some of the common fund structures are:

  • Domestic standalone – Delaware-domiciled fund set up for US resident investors. GP will receive its carried interest directly from the fund.
  • Ofshore standalone – Cayman and BVI-domiciled are most common setup for non-US residents and US tax exempts. GP will receive its carried interest directly from the fund.
  • Master feeder – set up with three funds, ofshore domiciled master fund with two feeder funds (onshore and ofshore). GP can receive its carried interest directly from the master or from the onshore fund as carry and from the ofshore fund as a performance fee.
  • Mini master – set up with two funds, Delaware-domiciled master fund with an ofshore feeder. GP will receive its carried interest directly from the master fund.

With our audit and tax adviser background, we work in conjunction with attorneys to review the private placement memorandum (PM) and limited partnership agreement (LPA). We also review fee structures, lockups, high watermarks and several other items of the PM and LPA that would directly have an impact on the manager.

In addition to tax and audit services, Prager Metis also has an advisory practice. In this practice, for example, we can perform surprise exams, do cyber-security testing and audit track records or performance results of the traders, which can be used to attract investors.

We can help with the selection of other core service providers. Some of the common core services are:

  • Fund administration – the fund administrator serves as the gatekeeper for the fund’s book and records, strikes the NAV and prepares reports for the fund’s investors. They also provide investor services (on-boarding, AML/KYC).
  • Prime brokerage/custody – clearing and custody of cash and securities, margin fnancing and securities leading. Services may vary depending on the type and size of the fund.
  • Software providers for front offce and portfolio management systems.
  • Compliance frms – regulatory flings, assistance to your CCO, SEC exam assistance and other services and products to help manage risk.

What are the requirements for an investment adviser to register with the SEC?

With the passage of the Dodd-Frank Act in 2011, the Securities and Exchange Commission adopted rules requiring investment advisers, hedge funds, and other private funds to register with the SEC, thus subjecting these advisers to the same registration requirements, regulatory oversight, and other requirements that apply to all other SEC-registered investment advisers.

Requirements

All non-exempt investment advisers to private funds use Form ADV to register with the SEC and/or certain state securities authorities. The Investment advisers are required to report on Form ADV the following:

  • Basic organisational and operational information about each fund they manage, such as the type of private fund that it is (e.g., hedge fund, private equity fund, or liquidi- ty fund), general information about the size and ownership of the fund, general fund data, and the adviser’s services to the fund.
  • Identification of five categories of “gatekeepers” that perform critical roles as advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).
  • SEC-registered investment advisers with at least $150m in private funds assets under management use Form PF to report, on a non-public basis, information about the private funds that they manage. Most advisers file Form PF annually to report general information such as the types of private funds advised (e.g., hedge funds or private equity), each fund’s size, leverage, liquidity and types of investors.

Exemptions While many private fund advisers are required to register, some of those advisers may not need to if they are able to rely on one of the following three exemptions:

  • Advisers solely to venture capital funds.
  • Advisers solely to private funds with less than $150m in assets under management in the US.
  • Certain foreign advisers without a place of business in the US.

Exempt reporting advisers are nonetheless required to file, and periodically update, reports with the SEC using the same registration form as registered advisers. Rather than completing all of the items on the form, exempt reporting advisers requirement information is limited to basic identifying information for the adviser and identity of its owners and affiliates, information about the private funds the adviser manages and about other business activities that adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients, and disciplinary history (if any) of the adviser and its employees that may reflect on the integrity of the firm.

Does Prager Metis work with the manager’s other service providers during the year?

Yes, Prager Metis’ emerging manager team will work with the manager’s other service providers to make sure that the necessary processes and controls are in place so the audit and tax return preparation go smoothly. Working with the fund administrator throughout the year, for example, would allow us to ensure that the appropriate reports will be produced for our audit and tax testing. Interim testing can also be done which may help point out some areas of improvement as well as reduce the time needed after year end. This will create efficiencies and the audited financial statements and K-1’s can be delivered sooner.

What other services can Prager Metis provide?

Prager Metis can also provide tax advice and the tax return preparation for the individual managers in addition to the management company and GP entity returns, including:

  • Structuring of the GP and management company as limited partnership versus limited liability company versus S-corporation.
  • Guaranteed payments for services, capital interest and/or granting of profit interest.
  • Partner and employee benefits plans.

Why should we use a mid-sized firm like Prager Metis as our auditor and tax preparer?

Expertise – retaining a boutique firm that has vast experience with fund clients is important as they can provide a more personalised but expert service at an attractive cost. They can also be your stra- tegic partner and work with you as you grow. Our fund clients, regardless of size, will have the full attention of our experienced partners and staff which will help the managers deliver the audited financial statements and K-1’s to their investors in a timely manner.

Checks and balances – having an experienced auditor in place while you are fundraising and after you launch gives your prospective investors confidence that you are serious about governance and risk prevention. Using a mid-sized firm with proven expertise shows that the fund’s management is concerned about quality as well as cost.

2019-06-20T15:38:45-04:00