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Have you ever heard about funds and wondered what they are and how they are set up? This post outlines what a fund is, who the main parties to a fund are and how the fund is formed.

What is a fund?

A fund is an actively managed collective investment vehicle that buys shares in and/or makes loans to a number of private companies. A fund allows investors to spread their investment risk and provides them with a capital return over the life span of the fund, usually around 10 years. The investments made by the fund are managed so that the maximum value possible is achieved for the investors on an exit, which could be by way of a listing on the stock market, share sale or asset sale.

Structure of a fund 

Limited partnership

The fund vehicle itself is an English limited partnership (LP or fund), which must be formed using a form LP5 with at least one general partner and one limited partner (the first limited partner being the founder partner). An LP is used as the fund vehicle because it is tax transparent, the partners can agree and regulate the constitution of the LP in a flexible limited partnership agreement and it is currently subject to a much lighter statutory and regulatory regime. In addition, investors in the fund are limited partners and have the benefit of limited liability (see below).

General partner

So before you can register your LP, you will need to have your general partner in place. The general partner has responsibility for the management of the LP business and unlimited liability for the debts of the fund. For this reason, the general partner tends to be a private limited company formed specifically for the fund to add a layer of limitation to this liability. As a fund will be an unregulated collective investment scheme for the purposes of the Financial Services and Markets Act 2000 (FSMA), unless the general partner is itself authorised under FSMA, it will engage an ‘authorised person’ to operate and manage the fund.

Founder partner

You will also need to have registered your founder partner before submitting the LP5 to register the fund. This tends to be a Scottish limited partnership because, in addition to the benefits of an LP set out above, it is also a separate legal person. This Scottish LP will in turn need its own general partner and founder partner. As with the fund itself, the general partner will be a private limited company but this time the limited partners will be the individuals setting up the fund. The founder partner of the fund (the Scottish LP) will be the vehicle through which the creators of the fund take their share of the fund’s gains (known as their ‘carry’).


If the general partner is not authorised under FSMA, it will retain a manager that is an ‘authorised person’ under FSMA to manage the fund’s investments. The manager is usually an authorised entity that the fund creators are already associated with or one that is happy to support the fund. The manager and the general partner of the fund enter into a management agreement setting out the services that the manager is to provide to the fund. The fees payable to the manager under the management agreement are paid by the general partner out of its profit share from the LP.

Limited partners

The limited partners of the LP are the investors, who contribute the money for the fund to invest. Limited partners are not allowed to control or participate in the management of the LP in return for limited liability, which suits investors.

The general partner and the founder partner enter into the limited partnership agreement that sets out the terms of the fund. The investors become limited partners of the LP by signing a deed of adherence to the limited partnership agreement.

Investment committee

In addition to the above, most funds will have an investment committee made up of representatives of the manager and the investors. The investment committee consults with and provides advice to the general partner and manager on a range of issues, in particular, conflict of interest or valuation questions.

A word of caution… 

The formation of a fund is a complex process and each fund is different. The sourcing of investors to invest in the fund may also be a financial promotion that is heavily regulated by FSMA. If you are thinking about setting up a fund, obtaining early and competent tax and legal advice is strongly recommended.


For more information, email blogs@gateleyuk.com.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.