Partnering with government-backed, or public, investors can be transformative for emerging fund managers. While these investors often have mandates extending beyond pure financial return (e.g., social, economic, or policy objectives), they generally expect high standards of compliance, commercial reasoning, and transparent governance. The environment can also be highly competitive and state-sponsored investors often reject the vast majority of proposals (over 90%). Conversely these public-backed market participants can offer vital support in launching a fund and often allow for a transparent and balanced investment approach where they provide up to 50% of the funding. Hence a diligent approach resulting in a successful fund raise from a public investor can have a determinative impact on the success of an emerging team.
To aid emerging teams we have gathered some core considerations when seeking investments from public investors. The information is based on both publicly available information as well as on our experience from assisting a multitude of emerging teams in successful fundraises from public investors.
In the context of new alternative investment funds (AIFs) public investors play a crucial role and have a governmental mandate to identify, fund and support new funds. Typically public investors fund independent management teams targeting SMEs, innovative or specific thematic areas like start-ups, digital transformation, deep-tech or climate-related initiatives. They do not, however, provide grants and new fund teams are wise to bear in mind that public investors, just like privately funded market participants, seek investments and returns on market terms. This means public investors almost always require balanced but fairly “LP-friendly” terms to ensure tax-funded ventures apply best practices and investments are made in a manner where they make the greatest impact. Hence establishment costs and similar terms are often capped at a lower level in publicly financed funds and many other terms have become standardized allowing for a cost-effective investment process (see further below).
Teams seeking investments from public investors must hence demonstrate not only the commercial viability of the proposed investment, but also comply with stringent demands on reporting, ESG and similar policy-driven criteria. This approach ensures emerging teams adhere to best practice which allows the public investors to continue funding emerging teams – an important aspect of their investment activities.
Although exact processes vary across institutions, a combined overview highlights several common steps:
Fund managers submit a pitch deck or placement memorandum, outlining their track-record, strategy, market analysis, team composition, projected returns and other key metrics. This is the team’s introduction to the investor and submitting a high-quality deck is paramount. Despite fund managers preparing the pitch-materials themselves the complexity and stakes involved therefore warrant efforts much like when preparing regulatory filings submitted to financial authorities.
TIP: Consult experts as needed and spend the time and effort required to submit all required information in an elegant package and terms which are in line with market practice. There are much fewer public investors why every single pitch is important and a poor presentation, lacking information or terms which significantly deviate are sure fire ways to fail early.
The public investor evaluates alignment with policy or national/regional priorities (e.g., technology, climate resilience, local economic development) in a follow-up session.
TIP: Public investors are particularly keen on ensuring that emerging teams present a focused and coherent strategy that aligns with their demonstrated track record and experience. Rather than attempting to cover the full spectrum of ESG frameworks or claiming expertise across multiple disparate sectors, successful teams typically concentrate on one or two key sectors or investment approaches where they can demonstrate genuine competence and differentiation.
Public investors are cautious of strategies that appear overly broad, inconsistent with the team’s background, or that seem designed merely to tick boxes across various ESG criteria without substantive expertise.
A venture capital team with a strong background in fintech, for example, would be better served focusing on financial inclusion and digital innovation rather than claiming additional expertise in renewable energy infrastructure or sustainable agriculture. Similarly, a team with deep experience in climate technology should resist the temptation to expand their mandate to encompass broader social impact themes where their track record may be limited.
This focused approach not only demonstrates strategic discipline but also allows teams to articulate a clear value proposition and competitive advantage within their chosen domain – qualities that public investors particularly value when assessing emerging managers.
A deeper review covers governance, track record, team expertise, sustainability measures, fundraising credibility, legal structure and similar. Managers must often complete comprehensive questionnaires.
TIP: Coordinate with relevant advisors/counsel to ensure the written responses are correct and reflect the message you wish to relay.
The investor decides which internal “mandate” (e.g., innovation, low-carbon economy) applies best and, if positive, proceeds with a preliminary indication of interest and commences with the legal documentation.
TIP: This is the critical stage to engage legal counsel if not already involved. Public investors often have extensive and specific documentation requirements that can differ from standard market terms. Early involvement by qualified counsel allows teams to understand and anticipate these requirements ensuring the initial documentation framework can accommodate public investor needs without requiring substantial restructuring later.
The terms of the investment are negotiated and finalized in the legal documents which encompass a fairly extensive legal package including legal- and tax opinions. Public investors also often have specific governance, reporting, transparency, and compliance requirements that must be integrated into the fund’s constitutional documents from the outset.
TIP: Anticipating and aligning with public investor requirements during initial documentation drafting is crucial to avoid extensive post-signature amendments. Such amendments typically require information provision to and approval from other investors potentially creating friction or delays from existing investors. Since public investors are often part of the first closing or at minimum are involved with approving the framework of the terms their requirements should be factored into the foundational documentation architecture rather than treated as subsequent modifications.
The governing body of the public investor formalizes an investment decision and the public investor can submit binding signature documents to the fund team.
Alternative investment funds are long-term investment vehicles deploying significant amounts of public and private capital. The legal terms and fund mechanics typically deployed have been developed by the private equity industry over many decades and are today a collection of terms and conditions which ensure a balance between the interests of investors and the management team. Due to the multitude of matters which should be governed under the fund documents the agreements are typically more complex than a standardized investment agreement and balance the interests of investors and managers while providing clear and concise governance and profit distribution mechanics.
Term sheet
A model term sheet is often provided to the fund team by the public investor along with standard side letters. With assistance of counsel the fund team reviews the terms and reverts with a proposed binding term sheet. Here the team is also under duty to ensure compliance with relevant laws and policy objectives, such as state-aid rules, registration under AIFMD and environmental reporting.
TIP: The terms required by public investors are often carefully considered and deviations will have to be based on sound reasoning. Consult your counsel early to discuss the framework for your fund’s intended terms to ensure they align with the requirements of your target investor base.
ISA/LPA
After the term sheet is in agreed form the fund team’s legal counsel provides investors with the proposed investment and shareholders agreement, or, depending on jurisdiction, the limited partnership agreement.
Subscription and KYC documentation
Once the ISA and other terms are in agreed form the investors can begin submitting signatory and subscription documents along with their relevant KYC and ancillary documents. This is the last step leading up to the first closing and is often managed by the fund-teams administrator to ensure compliance with applicable know-your customer and anti-money laundering regulations.
TIP: Start screening advisors, including administrators, early to ensure the team your fund deploys has the requisite knowledge and experience to effectuate a smooth closing.
Public investors, like larger private institutional investors, often have fairly comprehensive reporting and monitoring requirements. This may include portfolio company suitability assessments and sustainability monitoring, post-investment follow-up, and financial reporting including continuous performance updates. The bespoke reporting requirements of public investors can be significantly more extensive and time-consuming than standard investor reporting. These may include detailed ESG metrics, policy alignment assessments, local economic impact measurements, and sector-specific performance indicators that require substantial data collection and analysis efforts.
TIP: Carefully review any side letter with your counsel to ensure the monitoring and reporting requirements under the side letter can be adhered to. Additionally, it is advisable to engage your administrative agent early in the process to assess the scope and complexity of these reporting obligations. Many public investor requirements go beyond standard fund administration services and may necessitate additional resources, systems, or expertise from the administrative agent.
Emerging teams seeking investment from public investors will need to provide clear and concise answers to some key questions and the team should carefully evaluate how commercial aspects correlate with each other and the legal terms of the fund. For example, if a team is seeking to deploy capital in a very large number of portfolio companies the investment- and monitoring process may call for a larger team and hence the key executive clause may need adjusting. Conversely if the concentration in portfolio companies is too large the public investor may not approve the proposal as there is not sufficient diversification (a term governed under the investment policy).
Capital raising plan
Most public investors limit their commitments to part the total fund size (e.g., 25% or 50%), though this may increase under specific policy-driven circumstances. Managers must often illustrate how they plan to secure private LP investment for the remainder and present realistic fundraising timelines.
Legal and structural requirements
Funds must adopt transparent governance structures suitable for institutional oversight, often in an approved jurisdiction. State-aid considerations may also apply, ensuring fair treatment of private co-investors and other market participants. Often times a summary legal structure chart is requested at an early stage along with legal opinions evidencing the investors’ limited liability and tax treatment.
TIP: If the public investor raises an issue, it IS an issue. Take due notice of any terms or conditions they deem as problematic and address them.
Commercial terms, not a grant
Even with policy mandates, public investors expect market-based returns, competitive fee structures, and “skin in the game” from the manager to align interests. Some state investors also cap establishment costs and fund management fees below typical private-market levels which should be considered when compiling the establishment budget for the structure.
Experience and track record
A verifiable track record in venture capital, private equity, or related sectors carries significant weight. Public investors scrutinize evidence of successful exits and a credible pipeline.
Diversity and equal opportunities
Many public investors promote gender balance and underrepresented talent, expecting fund teams to demonstrate or plan for, diversity in leadership and decision-making. Some have explicit mandates, aiming for a target ratio of women in senior roles by a certain date.
Sustainability and reporting
Environmental, Social, and Governance (ESG) considerations are often integrated into every stage of the investment process, from initial screening to ongoing monitoring. Managers should therefore:
When acting as a cornerstone investor a public institution can significantly bolster a fund’s credibility among private LPs and as public investors require all investors are treated equally there is typically no carry-fee discount or similar cost for a public investor. Hence attracting a public investor at an early stage can significantly increase the chances of a successful fundraise and alleviate some of the financial risk associated with establishing a new fund. However, while early commitments by state investors are valuable, the manager still bears responsibility for completing the fundraising effort and meeting regulatory and commercial obligations towards all investors and it is not uncommon for private investors to require supplementation of the terms as previously approved by the publicly funded entity.
Luxembourg’s position as a key jurisdiction for alternative funds offers a compelling path for Nordic managers who wish to broaden their investor reach, and establishing a Luxembourg-based vehicle is a natural extension of a firm’s Nordic strategy.
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We have gathered some of the most common questions we are asked during the initial stages of establishing a new fund.
Oak One is a boutique law firm specializing in tailored counsel to private equity funds, institutional investors, family offices & founders.