What it is
A private fund pools money from several investors and invests it according to a stated strategy. Common types include private equity funds, venture capital funds, hedge funds, real estate funds, and funds of funds and secondaries. Unlike a mutual fund, a private fund is not sold to the general public.
Most private funds are offered under exemptions from SEC registration, often Regulation D. Under Rule 506(b), the issuer may not use general solicitation. Under Rule 506(c), general solicitation is allowed, but every purchaser must be an accredited investor and the issuer must take reasonable steps to verify that status.
Because of these rules, many private funds are open only to accredited investors. Under SEC Rule 501(a), that includes individuals with income over $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the last two years, or net worth over $1 million excluding the primary residence. Since the August 2020 amendments, it also includes holders in good standing of Series 7, 65 or 82 licenses, and knowledgeable employees of certain private funds. Entities and family offices with over $5 million in assets or investments can qualify, as can registered investment advisers and exempt reporting advisers.
How it’s traditionally been approached
Traditionally, private funds have been the territory of institutions, foundations, family offices and wealthy individuals. Access often came through personal relationships, banks or established advisers. Offering documents were reviewed by the investor with their own legal and financial professionals.
Many private funds are structured as limited partnerships. The investors are limited partners, and the manager is the general partner. Capital is often committed up front and then called over time. It is typically held for a multi-year period with limited or no ability to withdraw early.
Investors have usually looked at a fund's strategy, the manager's background, fees, terms, reporting practices and how the fund fits alongside the rest of their finances. Many also review tax reporting, which for some funds arrives as a Schedule K-1. Tax treatment depends on individual circumstances, so people typically consult a tax professional.
How the right fund manager may help
The right independent fund manager may help you see how a private fund is organized, what it aims to do and what risks come with it. A good conversation can turn dense documents into plain language. It may also help you work out which questions matter for your situation. No manager can promise an outcome.
A first conversation is generally an introduction. The manager may describe the strategy, the types of investors the fund is open to, how capital is called and how reporting works. They may also ask about your accredited-investor status, which is a regulatory requirement for many offerings. Any actual offering is made only by the issuer through its own offering documents.
Useful questions include: What is the strategy, and what could go wrong? What are the fees and expenses? How long is my money likely to be committed? How will I receive reports and tax documents? What does the manager do when things go badly? Review the answers with your own licensed attorney, tax professional and financial adviser.
The bigger picture
Money decisions are tied to wellbeing. Committing capital to something you cannot easily sell can affect how secure you feel, how you sleep and how you plan for the future. Many people find it helps to decide in advance how much uncertainty they are comfortable carrying. They also tend to want to talk it over with someone they trust.
Taking time to understand a private fund can bring peace of mind, whatever you decide. Some people choose to participate, some wait, and others decide it is not for them. All of those are reasonable choices. If financial stress is weighing on you, Providers.plus can help you find whole-person support alongside your financial education.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- The Hastings Fund is an independent directory and educational resource. It is not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank any investment or manager.
- Nothing here is an offer to sell or a solicitation of an offer to buy any security. Consult your own licensed legal, tax and financial advisers before making decisions.
Not sure where to start? Answer a few gentle questions and choose who you’d like to hear from.
Create an investor account →Frequently asked questions
What is a private fund?
A private fund is a pooled investment vehicle that raises money from a limited set of investors, usually without a public offering, and is run by a professional manager. Examples include private equity, venture capital, hedge and real estate funds. They are speculative and illiquid and can lose all of their value.
How is a private fund different from a mutual fund?
A private fund is generally offered privately under exemptions from SEC registration, while a mutual fund is registered and sold to the public. Private funds often limit who can invest and may restrict withdrawals. Their terms, fees and disclosures can also differ, so reading the offering documents carefully matters.
Who can invest in a private fund?
Many private funds are open only to accredited investors as defined in SEC Rule 501(a). That includes certain individuals based on income or net worth, holders of Series 7, 65 or 82 licenses, and some entities and family offices with over $5 million in assets or investments. Some funds have additional requirements, so eligibility depends on the specific offering.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) does not allow general solicitation, while Rule 506(c) does. Under 506(c), all purchasers must be accredited investors, and the issuer must take reasonable steps to verify their status. Which rule a fund relies on is stated in its offering documents.
Are private funds risky?
Yes. Private fund investments are speculative and illiquid and can lose all of their value. Investors may be unable to sell or withdraw for years, and past performance does not guarantee future results. Weigh these risks with your own licensed advisers.
How are private funds taxed?
Tax treatment depends on individual circumstances and on the fund's structure. Many private funds are partnerships that issue investors a Schedule K-1, which reports their share of income and other items. Some investments may involve provisions such as Section 1202 (QSBS), but whether any applies to you should be discussed with a qualified tax professional.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.