What is a Fund Model?

A fund model provides an overall view of an investment, including returns and distributions to investors. Usually, the model has a higher degree of complexity than other models because an investment fund is a legal entity that pools together capital to invest in one or more asset classes. A fund model typically includes four main design components: (1) historical data that provides an understanding of the current state of the fund, (2) assumptions regarding the future of operations, (3) mathematical formulas to forecast the financial and operational behaviors of the fund, (4) metrics and charts to assist in making business decisions. These visuals make the relevant information easier for an investor to read. Fund modelling can be used in a variety of scenarios, like business valuations, underwriting, acquisitions, management and operations decisions, budgeting of capital, and the analysis of financial statements. A fund model outlines the fund’s expenses, fees for operating the fund, and expected capital calls. A fund model will also include the distributions to the various Limited Partners of the fund. Furthermore, using a waterfall method allows the user to determine the order in which returns will be paid to investors. In a waterfall distribution, investors are split into different classes with varying return percentages. A forecast of capital reserves and operating budgets is included as well. This allows for the planning of capital deployment, hiring, and operational strategies.

What is Investor Reporting?

Investor reporting is the act of sharing key qualitative and quantitative data with your financial investors. An investor report is typically shared quarterly with its investors and provides portfolio updates by the fund managers. These updates give investors a high-level overview of cash position and the status of the firm and its investments over time. In addition, these reports allow the firm to build a relationship with their investors that will grow over time. Reporting will help build the confidence of the investor, thus increasing their future investments while maintaining strong client relationships.

Relation of Fund Models to Investors

Fund models allow investors to review these models to determine if the firm or fund is worth investing in. As a result, investors receive a high-level overview of what is going on at the firm over time, and these insights help to boost investor confidence. Similarly, good performance will make an investor happy, incentivizing them to invest more capital. Additionally, both the firm and investors can see if the expense and return objectives from the original model are being met. An investor is also able to quickly see what is driving or hindering the performance of their investment(s).

Conclusion

A fund model is the application of a financial model to the investment fund industry. These models include key qualitative and quantitative data and performance metrics to be shared with investors. As a result, investors are able to see a high-level overview of what is going on with both the firm and its investments over time. These fund models are essential in tracking the performance of the fund and their different investments, so that the performance and key data can then be communicated clearly and effectively with the fund’s investors.

Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.