When considering entering into a seed transaction, the manager should also consider the following: Seed Capital – Revenue Sharing Agreements. Seed capital agreements typically take the form of an income-sharing agreement between the seed investor and the manager of the fund in which the saw invests. A revenue sharing agreement is a contractual arrangement in which a seeder is entitled to a certain percentage (typically between 15% and 25%) of the gross or income of the manager sown and the deferred interest or incentive allowance received by the general partner of the seed fund. As a general rule, a seeder is also entitled to a percentage of the proceeds of a sale or initial public offering (IPO) of the manager and general partner. A supporter will place a great deal of emphasis on a potential manager`s risk management, business skills, and likely ability to accumulate assets and build a sustainable and profitable organization. Managers must clearly reflect their governance structure and relative responsibilities, as well as demonstrate their operational infrastructure and the level of experience of their chief operating officer. The ideal formula comes down to a good balance between hedge fund, trading and operational experience with a complete risk management overlay. For tax reasons, the seeder generally participates in the allocation of deferred interest or incentives in a revenue-sharing agreement, which the fund general partner advised by the seed manager receives through a special limited partnership in the respective master fund. The seeder receives its share of the carrying or incentive allowance as an allocation of the fund`s income to the seedholder`s capital account in the fund, allowing the seeder to receive the same long-term capital gains treatment (if any) that the general partner would otherwise be entitled to that income.

This structure also protects the general partner from restrictions on its ability to deduct payments from the share of income paid to the sawyer compared to the sower`s share of the carrying or incentive allowance. A first-loss capital agreement allows a manager to increase its assets under management and establish a roadmap without transferring part of its business to a seed investor, and allows the manager to maintain its autonomy and discretion with respect to its activities. The cost for the manager to complete the agreement is usually minimal, as the platform provider usually covers the installation and management costs. In addition, performance fees or higher allocations are often allocated to the manager on a monthly basis instead of having to wait until the end of the year, which can help the manager meet their cash flow needs. However, in exchange for these benefits, the AIFM must be able and willing to place the risk capital investment in the established account. A more appropriate seed model could be similar to mezzanine financing and which rmF has recently advocated. Mezzanine debt is still cheaper than equity financing because current shareholders are less diluted and do not cede ownership of the company. Seed investments can be considered as short- and medium-term loans, the interest of which is linked to the gross income of the fund.

FMR argues that returns on successful mezzanine transactions should be more fluid than a pure venture capital approach. A venture capital fund relies on a few home runs to select weak managers for its success: this is not the best way to achieve consistent returns. Investors in specialized seed funds will negotiate a longer freeze in exchange for the increased stake offered by the fund. It represents an opportunity to gain exposure to the profitability of underlying fund companies, which FMR describes as “a call option on the growth of the hedge fund industry.” A freeze is almost a requirement for such a fund, and lock-in periods usually vary between two and four years. A seed fund can have a lifespan of up to eight years. In the past, seed funds also used a leverage of 1.5 to 2 x capital. It remains to be seen whether this can be maintained in a climate where loans to funds are generally reduced. Specialized seeders like FMR will bring more than just investment capital to the table. They have extensive experience, a solid reputation in the market and established business networks. In some cases, specialized seeders may introduce the manager to other investors. Cole-Frieman & Mallon LLP is an investment management law firm focused on established and emerging hedge fund managers.

If you have any questions about hedge fund seed trading, please contact us. This article examines the different structures of seed transactions and their comparison with the increasingly popular first-loss capital agreements, and then examines the terms of equity rights and equity commitments of seed capital providers, which are often the subject of negotiations. Seafarers either pay reduced management and incentive allowances, execute their start-up investments, or pay the full costs, but take a share of the income from their seed capital. The additional terms that are often negotiated by seed investors are most-favoured-nation (MFN) rights, which allow them to obtain the most favourable investment rights offered to other fund investors. Transparency rights are often sought, which requires the manager to provide the seeder with additional information so that the seeder can verify compliance with the plant`s guidelines and calculate its share of sales. In addition, a seeder often looks for capacity rights that allow it to make additional investments in the manager`s hedge fund platform or in subsequent private equity funds on the same advantageous terms (expressed in additional dollars or as a percentage of the fund`s assets under management). .