I get calls all the time that start the same way. “How much do you charge for a set of fund documents?” Often, the caller will disclose that he or she is shopping around and has already called other lawyers to ask the same question. The second questions is typically: “how fast can you get it done?”
The answer to the first questions is always the same. “It depends.”
The reason why it always depends is that the cost of a project is based upon the amount of work involved and I can’t quote a project without learning about thet type of fund, its terms and the prospective client’s objectives. I then need to create a rough road map for the project. Once we have the initial discussion (which may take an hour or more), I can outline the scope of the work and provide a fixed fee price quote. This initial investment of time is crucial to a successful project for a few reasons.
- First, the prospective client hopefully learns a significant amount of information on the call. By spotting the issues in advance, the prospective client gets a feel for how straightforward or complex the project will be.
- Second, our discussions may expose whether I am a good fit for the project and vice versa. Problematic representations are typically accompanied by red flags early on. For example, is the prospective client insisting on taking an overly risky course of action? Are the expectations realistic?
- Third, the prospective client typically gets a feel for my level of expertise in the private funds area, both generally and with respect to the issues impacting the specific project. In this regard, if time is spent interviewing different firms, the client is usually able to see that there is a difference among law firms that can prepare a set of fund documents.
Stepping back, the concept of shopping for a set of fund documents is a bit off the mark. Sure, every private fund needs a set of offering and governing documents. However, what the client is really paying for or should be paying for is an attorney to quarterback the launch process. It is no secret that lawyers use precedents that they have on file to draft documents, and that a lawyer with experience drafting contracts may be able to copy and paste (or find and replace) his or her way through a set of private fund documents that look decent on their face. In certain cases, a generalist may be the cheapest option. However, a private fund specialist has often been thought SEC examinations, closely studied the statutes and regulations that govern the investment management industry, kept up with SEC news feeds, attended industry conferences, spoken with a critical mass of other managers, maintained close relationships with other industry service providers and seen enough sets of fund documents to opine on what is “market”.
The answer that I typically give in response to the second question, which pertains to timing, is as follows. Working on fund documents is what I do on a day-to-day basis, and therefore I can generate an initial set of well thought out fund documents very quickly, within a handful of days if there were a true need to do so, but the timing of a fund launch is outside of my control. I tell them that I will not be the holdup. I remind the client that they will need to interview auditors, engage an administrator (and go through an onboarding process), establish the fund and management entities, obtain tax id numbers and open bank accounts, all of which takes time. When the client receives my drafts, they need to read them cover to cover and digest what is in there. There are always questions and, depending upon the client’s level of experience, lots of phone calls, emails and explanations. Clients often change their minds about the fund’s terms (especially after speaking with investors), requiring re-drafting and additional back and forth. Along the way, a client who has not managed a fund before needs to learn about the industry and its regulation, set up operational processes and interact with several new categories of service providers. The fund must also be marketed and prospective investors often take their time when deciding whether to invest. In addition, hedge fund managers (who usually compare themselves to indexes of publicly traded stocks) typically try to launch on the first business day of a month, so if a fund misses that first business day target by as little as one day, the manager may decide to until the beginning of the next calendar month. Closed-ended funds typically don’t face this issue.
Prospective clients may not have engaged counsel for a fund launch before and may lack experience interviewing a law firm to serve as the quarterback on a private fund project, so I’ve created the following list of questions to replace “How much for a set of fund documents and how fast can you get if done?”
- Do you form private funds? If so, for how long have you been doing this? What percentage of your practice is dedicated to private funds? Approximately how many have you formed?
- Let me describe my project in some detail. Is this type of fund within your wheelhouse? Have you formed fund like this specific fund before? Can you describe how many and how similar? Are you able to mention the names of any other funds that you work with?
- Given my description, have you spotted any issues that sound especially tricky or that are likely to complicate the project? If so, do you have a game plan for how they will they be resolved? Does this add to the expected cost?
- Can I contact any references whose funds you formed?
- Who will be the person actually doing the work? Who will be my point of contact day-to day? How much experience does that person have? How long does it typically take to receive a response to a call or email from the day-to-day contact and from the senior person in charge?
- Realistically, how much time should I budget for launching the fund?
- How do you handle the billing? Is it a fixed fee or an hourly charge? If hourly, can you give a range? If a fixed fee, what is inside vs. outside of the scope of the fixed fee? How often do you exceed the fixed fee by going outside of the scope? Is it rare or typical that there will be charges in addition to the fixed fee?
- Can you recommend other service providers that I may need? Do they compensate you for referrals? Can you help me to form an overall budget for the project (including other service providers and out of pocket costs) both initially and on an annual basis?
- Will the project involve tax counsel or other tax specialists? If not, who will perform this analysis? How is that person compensated?
Selecting the best counsel for the job is crucial, since your fund counsel will typically serve as the quarterback for your fund launch. A bit of due diligence will help ensure a good fit and a first rate set of documents that arrive in a timely manner and at a decent price.