Funds-of-one: a strategic solution for investors and sponsors

 
Unlike a traditional commingled fund, a fund-of-one is established for a single investor, with capital held in a dedicated vehicle that can be tailored to that investor’s objectives, investment parameters, governance expectations, and economic requirements. These arrangements can benefit sponsors by supporting deeper strategic relationships with key investors while offering investors a more customized alternative to participating in a commingled fund.

Structures

Funds-of-one can come in many forms, but there are three main structures commonly seen in the market.

Alongside structure

In an alongside structure, the fund-of-one invests “alongside” one or more of the sponsor’s commingled funds. This approach can be relatively efficient for a sponsor to launch because it leverages the sponsor’s existing investment pipeline, operations, and fund infrastructure. The vehicle may operate as a sidecar or parallel fund-style vehicle that invests in lockstep and on a pro rata basis, or as an overflow co-investment vehicle that participates only after the commingled fund has taken its allocation.

Platform-access structure

In a platform-access structure, the fund-of-one invests into multiple sponsor-managed funds. This approach can be attractive where an investor is seeking diversified exposure across strategies, and where the sponsor is seeking to develop a broader strategic relationship with a significant investor.

Standalone mandate

A third structure is the fully customized standalone mandate. This is generally the most flexible structure, but also the most complex and resource-intensive. The parties must carefully define the mandate and assess whether it complements or competes with the sponsor’s existing commingled funds. While greater overlap may create allocation and sourcing issues, a more independent strategy may require dedicated resources, separate governance processes, and customized reporting or operations.

Economics

Economics are a key driver of fund-of-one negotiations. From the investor’s perspective, a significant commitment may justify more favorable management fee or carried interest terms than would be available in a commingled fund.

In the alongside structure, the dedicated nature of the vehicle may allow for customized economics without necessarily implicating the same Most Favoured Nation (MFN) dynamics that would arise if the investor had participated in the commingled fund.

In platform-access structures, an important principle is to avoid a double layer of fees at both the fund-of-one and underlying fund levels. A common solution is to charge fees only at the underlying fund level, with enhancements such as flat management fee discounts, stacking with size-based or early-closing discounts applicable at the underlying fund level, and/or treating the investor’s aggregate fund-of-one commitment as the basis for underlying fund fee breaks. As these arrangements can raise MFN issues in the underlying funds, sponsors often implement appropriate carve-outs for broader strategic relationships.

For standalone mandates, economics may also take into account bespoke operating costs relating to the launch and operation of the vehicle, including dedicated personnel, separate investment processes, and customized reporting.

Governance

For investors, a fund-of-one structure can offer enhanced visibility into investment decisions, portfolio construction, conflicts, remedies, opt-in or opt-out rights, and other key matters. For sponsors, the challenge is to provide an appropriate level of transparency and investor participation while preserving the ability to manage their broader platform and other fund vehicles effectively.

In alongside structures, investors will often expect the fund-of-one to invest and divest at the same time, on the same terms and in the same securities as the relevant commingled fund. Deviations may be appropriate in particular circumstances, such as warehousing and syndication mechanics or differences in vehicle duration, but those deviations should be clearly addressed and supported by transparency when they arise. Another central consideration with this structure is investment allocation: as opportunities are shared between the fund-of-one and the sponsor’s commingled funds, the parties must have a clear understanding of how investments will be allocated in practice.

In platform-access structures, the documents should address look-through rights at the underlying fund level, including voting rights, information rights, excuse rights and LPAC participation. A key threshold issue is whether the investor controls which underlying funds it participates in and the size of each commitment, or whether those decisions remain within the sponsor’s discretion.

Given the bespoke nature of standalone mandates, the governance package can be fully customized. That flexibility may extend to consent rights, allocation and conflict protocols, investment-level reporting, portfolio construction parameters, and other transparency or control rights that the investor and sponsor agree are appropriate for the mandate.

Conclusion

Funds-of-one sit at the intersection of several important developments in the private funds market: larger and more concentrated institutional commitments, increased demand for customization, and sponsor interest in building durable strategic relationships with key investors. While these structures offer clear benefits to both investors and sponsors, they also require careful calibration across structure, economics, and governance.