The capital raising process is full of big decisions. But one of the most significant is how you’ll structure your deals.
Funds, syndications, and Customizable Funds all come with unique pros and cons, so it’s important to carefully consider factors like your budget, your business goals, and the concerns that matter most to your investors.
In this article, we’ll walk you through some of the biggest pros and cons of starting a fund, so you can weigh your options and make the right choice for you and your investors.
3 Reasons to Start a Fund
There’s a reason why the fund model has been such a staple of capital raising for decades: Funds provide unique benefits that both investors and managers appreciate.
In particular, here are 3 of the most compelling reasons to start a fund instead of doing syndication deals.
1. Scale your business more efficiently
Many people are drawn to syndications because of the ease of raising capital on a deal-by-deal basis. What they don’t realize, however, is that this ability comes at a high monetary cost.
While syndications may be an appealing option when you’re just starting out or just raising for one deal, they’re not an efficient way to scale a business. A fund, on the other hand, is a much more scalable option because it brings together all your deals in one place.
This allows for simplified operations, easier investor management, and streamlined tax preparation, so you can focus on raising more capital and finding new deals.
2. Provide your investors with easy diversification
Most investors don’t want to put all their money into one property or one deal. Instead, they prefer the option to diversify their portfolio with multiple assets.
By investing in a fund, investors can instantly diversify, without having to go out and conduct due diligence on multiple deals or work with more than one sponsor.
3. Raise for multiple deals at once (without the extra paperwork)
If you’ve ever raised capital for multiple syndication deals at once, then you understand how time-consuming it can be to create a new PPM, file blue sky filings in every state you take investor money from, and distribute ACHs and K-1s for each separate syndication deal.
A fund allows you to bring multiple deals together under one PPM, with one K-1 per investor. This will save you significant amounts of time and money in the long run.
3 Cons of Starting a Fund
1. High barrier to entry for first-time fund managers
While funds can cost significantly less than syndications over time as you close multiple deals, they do come with a larger up-front cost. To succeed as a fund manager, you’ll also need to build a strong investor base, which is why some capital raisers prefer to start out raising for one syndication deal at a time.
2. Lack of control for investors
Unless you’re raising capital through a Customizable Fund, the fund model does not allow investors to choose which deals they want to participate in within your fund. This can be a drawback for investors with lower risk tolerances, or those who have experience with syndications and want to play a more active role in choosing their deals.
3. Asset class and business model limitations
In a world where market conditions are always changing, it’s important for capital raisers to have the opportunity to pivot. Traditional funds can make this challenging, as they require you to choose one asset class and one business model for the entire fund.
How to Choose the Right Fund Structure
As you’re considering the pros and cons of starting a fund, you should keep in mind that not all fund structures are created equal. Some of the cons described above can be avoided by setting up a Customizable Fund instead of a traditional blind pool fund.
Blind pool funds are investment funds where investors rely on the expertise and discretion of the fund manager to select suitable investments on their behalf. In other words, investors join the fund and then the fund manager chooses how to allocate their capital across different deals.
While blind pool funds offer investors the potential for high returns, they also entail higher risk due to the lack of transparency in investment selection.
Unlike traditional funds with predefined investment strategies and structures, the Customizable Fund model allows fund managers to create bespoke investment vehicles that align precisely with their investment thesis, target markets, and risk appetite.
These funds empower investors to participate in specific investment opportunities within a single fund while retaining control and transparency over their investments.
Fund managers can streamline their investor management, reduce costs, and raise for deals across multiple asset classes and business models, all in one place. And investors will appreciate the opportunity to choose their deals and monitor how their investments are performing in real time.
Plus, the cost of starting a customizable fund is significantly lower than a traditional blind pool fund.
We Want To Help You Start Your Fund
If you’ve read through the pros and cons and believe a fund is right for you, let us help you set it up.
To learn more about how an Avestor Customizable Fund can work for you, schedule a free strategy call with our team at www.avestorinc.com/demo
