A blind-pool fund asks investors to commit capital before they know what it will buy. They are underwriting the manager's judgment, and the first thing they ask for is evidence of it. A sponsor without a record of prior investments has a hard time answering that question. Investing deal by deal through SPVs is a sensible way to build the answer. Each investor decides on each deal, the sponsor shows it can source, diligence, and close, and the results become a record a later fund can point to.

Most of what a sponsor sets up for its SPVs can carry over to a fund. That works best when the SPV structure is built with the fund in mind.

Why Start With SPVs

For investors, an SPV is a single decision about a single company or asset. They can see what they are buying, and they can say no. That makes it easier to raise money for a sponsor without a fund history. For the sponsor, each deal builds three things at once: a set of investments with measurable results, a group of investors who have seen how the sponsor works, and the operating systems a fund will need, such as subscription processing, investor reporting, tax reporting, and capital accounts.

The trade-off is that each deal has to be raised separately, and the sponsor's economics are deal by deal. Some sponsors stay with SPVs indefinitely. Others treat the SPV period as a few years of building toward a first fund.

Making the Record Count Later

A track record is only useful if a prospective fund investor can rely on it. That depends on records kept at the time, not reconstructed later:

  • Attribution. Who sourced the deal, who made the investment decision, and on what basis. An investment memo for each deal, approved by the decision makers named in the GP entity's operating agreement, is the simplest proof.
  • Consistent numbers. Capital invested, distributions, current valuations and how they were set, and returns calculated the same way for every deal, with fees and carry shown both ways where relevant.
  • Ownership of the record. If a principal leaves, who can present the deals as their track record? The GP entity's operating agreement should address this along with carry vesting and departures.

The rules on presenting performance depend on the adviser's status at the time it markets the fund. If the adviser registers with the SEC, the marketing rule governs how performance is advertised, and the books-and-records rule requires the records that support it. An exempt reporting adviser is not subject to those two rules, but the antifraud provisions apply to every adviser. Rule 206(4)-8 specifically prohibits misleading statements to investors or prospective investors in a pooled investment vehicle, which includes a fund relying on Section 3(c)(1) or 3(c)(7). Keeping fund-grade records from the first SPV costs little and avoids a scramble later.

What Carries Over

If the SPV platform is built on the usual three layers, the core of it continues into the fund:

  • The GP entity. The Delaware LLC that manages each SPV and receives the carry can serve as the general partner of the fund, which is likely to be a Delaware limited partnership. Some sponsors form a new GP entity for each fund, but the existing one, with its ownership, carry, and vesting terms already agreed, is the starting point. See The GP/LP Fund Structure.
  • The management company. The entity that advises the SPVs becomes the fund's adviser. Its Form ADV is updated rather than started from scratch. Whether its exemption still fits once the fund is added is a separate question, covered in Venture Capital Fund Adviser or Private Fund Adviser.
  • The team's economics. Carry participation, vesting, and departure terms set at the GP level apply to the fund's carry as well, if the documents are written that way.
  • The investor base and the paperwork. SPV investors are the natural first prospects for the fund. Their subscription documents, questionnaires, and KYC files make onboarding faster.

This is the main reason to set up a separate GP entity and management company from the start. GP Entity and Management Company: Do You Need Both on Day One? covers that choice.

Choose the Offering Exemption With the Fund in Mind

How the SPVs are marketed affects how the fund can be marketed. A sponsor that raises its SPVs under Rule 506(c), with open marketing on a website or platform, can keep using 506(c) for the fund, with verified accredited investors. A sponsor that wants to raise the fund under Rule 506(b) needs to be careful about investors it first reached through general solicitation. The SEC staff's view, in Securities Act Rules Compliance and Disclosure Interpretation 148.01, is that an issuer can sell to those investors in a later 506(b) offering only if it established a substantive relationship with them before that 506(b) offering began. A short accreditation questionnaire or the passage of time alone does not create that relationship. The two exemptions are compared in Rule 506(b) vs. 506(c).

What Changes When the Fund Arrives

A blind-pool fund adds terms an SPV never needed: commitments drawn through capital calls, an investment period, management fees usually based on commitments during that period, key-person provisions, often an advisory committee, and a full private placement memorandum. It also adds conflicts that an SPV-only platform doesn't have. Once a fund exists, every new deal raises the question of whether it goes to the fund, to an SPV, or to both. The allocation policy, and the terms of any co-investment SPVs alongside the fund, need to be written down and disclosed to fund investors before the first close.

The Investment Company Act analysis also changes. A fund relying on Section 3(c)(1) is limited to 100 beneficial owners, and a sponsor whose SPVs have grown a large investor base may find that cap tight. The alternatives are covered in Investment Company Act Limits for SPVs. Investors outside the United States, or U.S. tax-exempt investors, may need a parallel or feeder vehicle, which is discussed in Offshore Fund Structures: Cayman Islands, BVI, and Delaware Compared.

None of that has to be built on day one. What should be in place on day one is a structure that doesn't need to be taken apart later, and records that will still be credible when a fund investor reads them.

If you're starting a sponsor platform with a fund in mind, we're glad to talk through how to build the SPV side so it carries over. More on our approach is on the fund formation page.