Since launching our rolling fund newsletter, we’ve encountered some frequently asked questions about rolling funds. This guide explains the mechanics of the rolling fund structure and how to invest in a rolling fund, and explores the wider impact on venture capital and early-stage investing.
Here are our answers to the FAQs.
- What is a rolling fund?
- How will rolling funds impact the venture capital industry?
- What is the technology behind rolling funds?
- How does an LP subscribe to a rolling fund?
- How much does an LP need to contribute to a rolling fund?
- Does a rolling fund have to deploy all its capital every quarter?
- What are the major implications of a quarterly subscription cycle for rolling funds?
- What does the fee structure for rolling funds look like?
- How do rolling funds handle distributions?
- What are the major benefits of rolling funds?
- Miscellaneous FAQ
Do you have more questions you’d like to ask about rolling funds? Feedback? Comments? Follow us @RollingFund on Twitter.
What is a rolling fund?
A rolling fund is a new type of investment vehicle that allows its managers to share deal flow with fund investors on a quarterly subscription basis while netting carried interest over a multi-year period (e.g. two to four years).
A rolling fund is structured as a series of limited partnerships: at the end of each quarterly investment period, a new fund is offered on substantially the same terms, for as long as the rolling fund continues to operate. With this fund structure, rolling funds are publicly marketable and remain open to new investors. (Hence the term, “rolling.”)
How will rolling funds impact the venture capital industry?
This is an open question. It remains to be seen what the impact of rolling funds will be on venture capital and, in particular, early-stage investing.
If rolling funds turn out to be a strictly better way to raise capital and invest money, compared to a traditional fund structure, we’ll expect to see hundreds or thousands of new rolling funds. Many of these funds will be managed by first-time “founders turned funders” who otherwise might not manage funds. Hundreds of new rolling funds in the coming years would certainly have an impact on the early-stage investing landscape.
What is the technology behind rolling funds?
Currently, AngelList offers an early-access program for Rolling Venture Funds through their platform. There is quite a lot of technical and operational work behind the management of rolling funds — this infrastructure includes:
Fund management and accounting requirements…
- Legal documents and regulatory filings
- Bank accounts and special purpose vehicles (SPVs)
- Fund pages and marketing documents
- Tax reporting and Schedule K-1 forms
Investor management dashboards…
- Fund subscription management
- Subscription status and auto-renew
- Minimum term commitments
- Fund distributions
Portfolio management software…
- Investment and company tracking
- Portfolio valuations
- IRR and other performance calculations
How does an LP subscribe to a rolling fund?
Right now, qualified participating LPs can apply to subscribe to rolling funds through the AngelList platform. Rolling funds only raise money from accredited investors and, crucially, AngelList handles the onboarding of accredited investors to their platform.
Rolling funds, being 506(c) funds, require additional steps to verify the accreditation status of their investors. U.S. and non-U.S. investors should review the standards under their applicable securities laws, as well as the fund platform’s accreditation process, to qualify as an accredited investor.
A subscription commits an LP to making a capital contribution to the next quarterly fund (at the beginning of the next quarterly investment period). LPs participate in deals starting in the next quarterly fund, so new LPs to a rolling fund don’t come into existing deals.
Note: This guide aims to provide a helpful overview of the rolling fund investment process, but LPs in any rolling fund should carefully review the fund’s investment details and terms, as they may differ from this guide.
How much does an LP need to contribute to a rolling fund?
It’s entirely up to fund managers to set the specific terms and investment details for their rolling funds. The minimum quarterly subscription can be as low as $1,000 per quarter for some funds. More typically, this minimum quarterly subscription ranges from $6,250 per quarter ($25,000 per year) to $25,000 per quarter or more.
Rolling funds may also include a minimum subscription period (e.g. requiring four quarters of capital contributions). By subscribing to a rolling fund, an LP commits to making a contribution each quarter, and LPs are able to modify their subscription or cancel it after meeting the minimum number of capital contributions.
Does a rolling fund have to deploy all its capital every quarter?
If a fund doesn’t deploy all its capital in a given quarter, the remaining capital balance is automatically rolled into the next quarterly fund as additional capital from the fund’s currently-participating subscribers. LPs receive a corresponding contribution to the new quarterly fund in addition to their subscribed-for capital contribution.
What are the major implications of a quarterly subscription cycle for rolling funds?
One huge benefit for fund managers is they can raise money for a rolling fund incrementally, quarter-by-quarter and one investor at a time, rather than having to fundraise all-at-once over a six or twelve (or even 18!) month period and deploy this capital over several years.
What does the fee structure for rolling funds look like?
For LPs, the key terms and investment details for rolling funds are always disclosed. This includes terms and fees like:
- Management fees (e.g. around 2% per year over the life of the fund, calculated and charged quarterly)
- Carry (e.g. around 20%, and sometimes increasing to 25% or more after a 1-3x multiple of invested capital is returned to investors)
- “Recycle” fees (sometimes, a fund manager will reinvest a portion of the management fees back into their fund, which lowers the total effective cost)
- Minimum term commitment (anywhere from a single quarter or four quarters, to four or more years)
Of course, fund management platforms like AngelList also charge a fee for their platform services. The fees for operating a rolling fund are largely similar to the fees for traditional funds and syndicates already on these platforms, although these fees may be lowered in the future due to the operational efficiency and scale of the rolling fund structure.
For example, a fund management platform like AngelList charges:
- Platform and administrative fees (e.g. an “admin fee” equivalent to 0.15% of capital commitments for a standard ten-year term, calculated and charged quarterly for the first four years)
- Minimum fee per series (e.g. $20,000 per quarter, waived for the first two quarterly series)
- Carry (no carry if you “bring your own” LPs and 5% carry for LPs sourced on the platform)
These and other fees are charged to rolling funds for access to the platform, and they’re reflected in the terms offered to LPs.
How do rolling funds handle distributions?
Distributions (the disbursement of cash and carry) for rolling funds are similar to typical funds. Rolling funds are structured as a series of limited partnerships, so subscribing LPs receive distributions (net of fees) from the quarterly funds in which they’ve contributed capital.
What are the major benefits of rolling funds?
Rolling funds can offer unique benefits to all concerned parties: founders looking to raise capital for their startups, LPs looking to diversify and invest in startups, and GPs and operators looking to start their own funds.
For LPs, rolling funds offer an easy way to invest in startups, access to deal flow, and diversification in a potentially uncorrelated asset class.
Since GPs may commit to only investing through their rolling fund, and not through any other vehicle, a rolling fund offers a simple way to “roll up” and capture all of a GP’s deal flow in a single investment.
For founders looking to raise capital, rolling funds can add a lot of value beyond the money they provide. Rolling funds are often started by founders, for founders, and with “founder friendly” terms. Rolling funds may be set up to pursue specific opportunities and focus on seemingly “niche” verticals, leading to a better fit between rolling funds and the founders they fund.
For GPs and operators, rolling funds can lower the costs associated with setting up and operating a fund. The 506(c) Rule also means rolling funds are publicly marketable, which gives fund managers a major new channel to reach out and talk to accredited investors. Fund managers with large online platforms can advocate for portfolio companies with their audiences.
Right now, AngelList has an enormous head start and first mover advantage to create and define the entire rolling fund category through their Early Access Program for Rolling Venture Funds. However, you can expect other fund administration platforms to research and adopt a similar fund offering for their online platforms.
Rolling funds are an entirely new thing. Needless to say, we’re excited about the possibilities.
What is Rule 506(b)?
Under applicable securities laws, any offer or sale of a security must either be registered or meet an exemption. Regulation D, or “Reg D,” under the Securities Act of 1933, provides a number of exemptions from these registration requirements.
Venture capital funds rely on the exemptions in Rule 506 to raise money without having to meet certain registration requirements. However, under the “safe harbor” of Rule 506(b), one tradeoff is that fund managers cannot publicly market their funds.
The SEC website’s full definition of Rule 506 of Regulation D is available here.
What is Rule 506(c)?
Notably, rolling funds are covered under Rule 506(c). You’ll often see the term “506c” bandied about on Twitter as a shorthand for the public marketability of rolling funds.
The Jumpstart Our Business Startups Act in 2012, or JOBS Act, amended Rule 506 by adding Rule 506(c), which eliminated the restriction on general solicitation for fund offerings relying on Rule 506(c), while also imposing more stringent requirements on who can invest.
Under Rule 506(c), a fund may broadly solicit and generally advertise an offering provided that, among other things, all investors in the offering are accredited investors. The fund issuer also has to take certain steps to verify investors are all accredited investors and make sure certain other conditions in Regulation D are satisfied.
What is an accredited investor?
Under applicable securities laws, only an accredited investor may participate in or invest in certain private securities offerings. Generally speaking, investors have to meet certain standards, such as minimum net assets or annual income requirements, to qualify for accredited investor status.
What is a QP?
A qualified purchaser, or “QP,” must exceed a higher bar such as $5 million in investments as an individual or $25 million in investments as an entity. Under certain exemptions, funds are permitted to have more of these individuals or entities participating as investors. Rolling funds are set up with parallel fund structures underneath, so a fund may have a limited number of accredited investors (the “99/250 investor” limit) and a higher or unlimited number of QPs.
The term “qualified purchaser” is defined in Section 2(a)(51) of the Investment Company Act of 1940. You can visit the SEC’s website here for the full definition.
What is carry?
Carried interest, or “carry,” is the share of profits from a rolling fund that’s paid out to its managers. A fund administration platform also charges carry as part of their fee structure for managing a fund’s operations.
What is an LP?
A limited partner, or “LP,” is an investor who commits capital to a rolling fund on a subscription basis.
What is a GP?
A general partner, or “GP,” is involved in the management of a rolling fund, while LPs have no active role or day-to-day involvement. GPs charge both a management fee and carry, as a performance fee, for managing their funds.
Are rolling funds the same thing as “evergreen” funds?
Rolling funds are occasionally confused with evergreen funds. An evergreen fund is a different kind of fund structure that “marks-to-market” its portfolio, typically every few years, and allows new LPs to invest during this funding window. However, this concept is unrelated to rolling funds.
Last updated: Sep 9, 2020