Fund costs - so what does it cost to run a fund?
We get this question a lot. So here is a summary of what you should expect with a customizable fund. We also have a calculator that we are happy to share with you so you can estimate detailed numbers for your fund.
Expense Categories
First, let’s start with the primary expense categories and if that expense can be considered a fund expense or a management entity expense. Fund expenses are shared across all investors. Management expenses should be paid for by the managers as part of running the fund.
| Expense Category | Fund Expense | Where to Expense |
|---|---|---|
| Fund legal documents preparation (PPM, Operating agreement, subscription agreement) | Yes | Fund LLC directly or Management LLC (w/reimbursement back at a later time) |
| State filings fees / registered agent fees | Yes | Fund LLC |
| Blue Sky filing fees | Yes | Fund LLC |
| Bookkeeping/Accounting costs | Yes for fund LLC No for management LLC | Both |
| Investor compliance costs | Yes | Fund LLC |
| Investor compliance costs | Yes | Fund LLC |
| Bank fees (including wires) | Yes for fund LLC No for management LLC | Both |
| Tax preparation costs | Yes for fund LLC No for management LLC | Both |
| Fund management fees (mgr compensation) | Yes | Fund LLC |
| Technology platform (Avestor) | Yes | Fund LLC |
| Fund marketing expenses | Yes | Fund LLC |
| Travel expenses | No initially Yes after larger AUM | Manager LLC initially Fund LLC option later |
Estimated Expenses
Starting and running a fund is like any other business. You have to spend money to make money. Sponsors should be prepared for startup and operations costs just like any other business. The big difference is that while many of the costs are initially borne by the fund manager, they are considered fund expenses, and the fund manager can get compensated back by the fund and its investors as income starts flow back from investments.
Below is a range of expenses fund managers should expect on Avestor’s platform:
| Expense Category | Estimated Cost | Notes |
|---|---|---|
| Fund legal documents preparation (PPM, Operating agreement, subscription agreement) | $10,000 | Initial fund manager cost Best to amortize back to fund as fund expense over a period of years |
| State filings fees / registered agent fees | $500 | State filing fees & registered agent fees for 2 LLCs |
| Blue Sky filing fees | $200-$1500 | Paid by fund to the state the 1st time an investor invests from that state. For most states, its a one time fee but some states have annual renewals |
| Bookkeeping/Accounting costs | $500 annual CPA review of books | Avestor also provides bookkeeping support at no additional cost. This is a shared resource model, but we expect that a majority of funds will not have to pay additional bookkeeping/accounting costs. |
| Investor compliance costs | $50 - $100 per investor | Some funds absorb costs while others have investors pay for their own accreditation letters & checks |
| Bank fees (including wires) | $0 - $30 / month | Monthly fees are minimal, wire fees vary. |
| Tax preparation costs | $800 to $1000 for the return plus $50 - $100 per investor K1 | Tax preparation costs scale with number of investors. |
| Fund management fees (manager compensation) | 0% - 2% | of assets under management |
| Avestor’s platform | $5000 initial setup fee + 0.35% to 0.50% annual | of assets under management |
| Fund marketing | Varies | Expenses vary depending on strategy |
| Travel expenses | Varies | Once a fund grows larger (over $10 million AUM), you can consider this but initially we recommend not adding travel expenses due to impact on overall fund expenses |
Working Capital Requirements
Just like any other business, fund managers need sufficient working capital to start a fund. While you will get reimbursed for all the fund expenses, managers will likely have to absorb fund expenses for 6 to 12 months until their investments start generating income. Managers can then start to reimburse themselves. The summary below provides an estimate of working capital requirements to ensure managers are prepared to absorb fund expenses until they get reimbursed.
Low fund AUM: assumes end of year 1 AUM of $2m, investors from 5 states, bookkeeping internal
$25,000 maximum working capital required.
Reimbursement starts at month 7.
Total year 1 reimbursements of $15,000 (0.5% expenses + 0.5% for Avestor fees)
Net ($10k) after year 1 that will be recovered in Year 2
Fund manager compensation is not included since this is your compensation for running the fund.
High fund AUM: assumes end of year 1 AUM of $8m, investors from 10 states, bookkeeping external.
$55,000 maximum working capital required.
Reimbursement starts at month 7.
Total year 1 reimbursement - $60,000 (0.5% expenses + 0.5% for Avestor fees)
All initial fund expenses will be reimbursed.
Fund manager compensation is not included since this is your compensation for running the fund.
Summary
Fund managers should focus on scaling AUM in the fund. By scaling AUM, it is easier for the fund to absorb the initial and ongoing expenses associated with the fund and fund managers can get reimbursed more quickly for their initial outlays.
An AUM of $1 million covers Avestor fees. Getting to $3 million helps recover all ongoing expenses and $5 million allows you to recover all your initial legal costs in first year versus spreading out recovery over multiple years.
