Private Fund Education for Business Owners After a Liquidity Event

A private fund is a pooled investment vehicle that raises money from a limited group of investors rather than the general public. Instead of being offered on a public exchange, interests are typically sold under exemptions from SEC registration. A fund manager then invests the pooled capital according to a stated strategy described in the fund's own offering documents.

Private funds come in many forms. Some focus on funds of funds and secondaries, which hold interests in other private funds or buy existing stakes from earlier investors. Others focus on private credit, which involves lending outside traditional banks, or on infrastructure and real assets, such as physical or asset-backed holdings. Each has different features, risks and time horizons.

Access is often limited to accredited investors under SEC Rule 501(a). Categories include individuals with income over $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the prior two years with the same expected this year, or net worth over $1 million excluding the primary residence. Since the August 2020 amendments, holders in good standing of Series 7, 65 or 82 licenses, and knowledgeable employees of certain private funds, may also qualify. So may entities and family offices with over $5 million in assets or investments, as well as registered investment advisers and exempt reporting advisers. Private fund investments are speculative and illiquid and can lose all of their value.

Business owners have often built most of their wealth inside one company. After a sale, the traditional conversation tends to shift from concentration to diversification: how proceeds might be spread across different asset types, time horizons and risk levels. Many people work with a team that may include a wealth adviser, tax professional and attorney.

Private funds have traditionally been considered alongside, not instead of, more liquid holdings. Because interests are generally hard to sell and may be locked up for long periods, people often think first about how much accessible cash they need for living expenses, taxes, family needs and opportunities before considering anything illiquid.

Funds are generally offered under Rule 506(b) or Rule 506(c). Under 506(b), the issuer may not use general solicitation. Under 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status. Investors typically receive a K-1 from partnership-structured funds, and some owners also ask about QSBS under Section 1202. Tax treatment depends on individual circumstances, so these topics are best reviewed with a tax professional.

The right independent fund manager may help you understand how a particular strategy works, what it is designed to do and what could go wrong. A good conversation is generally about education and fit, not pressure. Any offering is made only by the issuer through its own offering documents, and nothing here is an offer or solicitation.

In a first conversation, you might ask: How does this strategy generate returns, and what are its main risks? How long is my money typically committed, and under what circumstances could I access it? What fees and expenses apply, and how are they described in the documents? How might this relate to the rest of my holdings? Past performance does not guarantee future results, so it is reasonable to ask how a manager discusses both good and difficult periods.

It can also help to bring your own licensed advisers into the process. They can review offering documents, test assumptions about liquidity and concentration, and consider tax and legal implications for your situation. The Hastings Fund is an independent directory and is not a broker-dealer, funding portal or investment adviser, and does not recommend, endorse or rank investments.