Everything you need to know about investment funds?
To create an investment fund is to create a financial company that aims to invest capital in business projects. There are different categories of investment funds, including:
The venture capital.
The capital development.
The LBO or Leveraged Buy-Out.
What is an investment fund?
The investment fund or mutual fund refers to a financial company, private or public, whose main objective is to invest capital in business projects. It brings together several investors who pool funds, which will then be invested in selected companies.
Who can form an investment fund?
The investment fund can be constituted by financing organizations, banks, or individuals. The investors are mostly specialized in a particular sector. The creation of an investment fund is accessible to small and large investors. In this regard, there are three categories of investors:
What is an investment fund for?
The investment fund makes it possible to provide assistance to businesses. In principle, an investment fund is set up for a period of three, five, seven years, or more. The funding provided can contribute to:
When setting up a business (creating a brand, creating a business service company, creating a private security company, etc.);
To the development of its activities;
When setting up an international business.
How does an investment fund work?
The operation of an investment fund is based on the constitution of funds and their investments in different products (bonds, stocks, Treasury bills, etc.). The funds formed by the investors are placed in companies previously selected according to numerous criteria, with a view to profitability.
Use of investment funds
The investment fund can be used for different purposes: to provide liquidity for the creation of a company or its development, to help a company to survive. There are different types of possible investment funds, namely venture capital, development capital, seed capital, the LBO (Leveraged Buy-Out), and capital reversal.
1. Venture capital
Venture capital is the paid-up capital in order to finance the start of the activity. This investment capital consists of entering the capital of the company when it is created in order to contribute to its development. It most often concerns young companies which have a strong potential for development and which have optimal innovation capital.
Before investing, venture capitalists often conduct a study that focuses on:
The company's development plan, if it is in the creation phase;
The financial statements for an already established company.
They manage the portfolio of projects by spreading the risks over the other companies in which they have invested.
2. Development capital
Development capital corresponds to the capital paid in during the life of the company to promote its development. It helps growing companies to:
The integration of a new market;
The purchase of production equipment;
The launch of new services or products.
3. Seed capital
Seed capital helps meet the financing needs of a business for its creation. It can be used to ensure the research and development phase, the establishment of prototypes, etc.
4. LBO transactions
LBO transactions correspond to the investment fund used in the context of the buyout of a company or during a transition period. They are generally financed by a contribution in equity or bank debt and allow a significant leverage effect.
The LBO is often accompanied by the creation of a holding company that will be responsible for the debt with a view to the takeover of a company. The repayment of the debt will be done gradually thanks to the results of the holding company (SAS).
5. Capital reversal
The capital reversal intervenes during a plan of judicial recovery of a company. This investment fund is intended primarily for companies facing significant financial difficulties. It makes it possible to inject capital and offer support to help them turn around companies. Rollover capital presents considerable risks. For this reason, it is generally reserved for specialized investment funds.
Advantages and disadvantages of an investment fund?
Investors are interested in setting up an investment fund for many reasons. Truth be told, this offers a lot of advantages, but it also has some disadvantages.
Advantages of the investment fund
The advantages of an investment fund relate above all to the possibility of setting up professional management and making diversified investments. More concretely, creating an investment fund allows:
To invest in different economic sectors;
To realize the investments are on different tracks;
To reach foreign markets;
To allow small investors to reach difficult markets;
To transfer investments to other funds of the same family with the same fee structure;
To carry out systematic withdrawals ;
To carry out transactions (sell and buy funds) to obtain liquidity;
Obtain a capital gain (obtained following the sale of fund units) that can be received in cash or reinvested;
Obtain a distribution gain (obtained through interest, capital gains, dividends, and income received from the investment).
Disadvantages of the investment fund
The main disadvantage of the investment fund concerns mainly the management fees. They can reach 2.50% and depend on several factors such as the type of fund and the management style.
Are you interested in establishing your own Investment Fund or Investment Banking firm?
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For a confidential consultation on how to establish your own Investment Fund or Offshore Bank & Capital Trust, please contact us: