Seeding and Acceleration Deals

April 22, 2020

The concept of seeding is straightforward. A fund manager receives an allocation from one or more investors of sufficient size in order to ensure the launch of his hedge fund strategy. Unfortunately, that is where the simplicity broadly ends. Whilst the larger and more established seeders do have their own 'standard' terms, there is no such thing as a 'standard' seed deal. Seeding deals can vary widely, from seed investors who seek preferential investment terms, to seed investors who also seek control over the constitution of the fund and its offering terms together with a share of future revenues and/or an equity stake in the investment management business. In return for such terms, the fund manager should secure committed seed capital which will remain in the fund for an extended period allowing the manager time to build its track record and attract new capital.

In recent years, would be start-ups have also turned to what might be considered 'alternative' seeding arrangements ‎as a result of a depletion in the availability of traditional seed capital and higher barriers to entry caused by an increase in regulation and also the costs required to establish and run an investment management business. Even if it is possible to establish and run an investment management business with very low costs (and with relatively low assets under management), a fund will often need to be of a certain size to attract institutional quality investors.

Seed deals may include or be separate from 'early bird' or seed/founder share classes which are often offered to early stage investors. These classes will usually bear lower fee rates, often in return for a longer lock-up period and perhaps a higher minimum investment amount. The availability of these classes is often limited to a specified investment amount and/or time period

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