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While tangential to the private funds industry, the news last week that cryptocurrency exchange Coinbase is packing its bags and reincorporating in Texas got me thinking again about Delaware’s place in the onshore US private fund world.
The Diamond State has certainly been catching some flak lately, and Coinbase’s high-profile exit – announced in a Wall Street Journal op-ed, no less – turns up the temperature just a little.
But should private funds be thinking about alternatives (pun intended)?
Not really. Not yet, anyway. As someone who spends most of his working life helping emerging and existing managers launch funds and managing their middle and back office, Delaware remains the gold standard. While Coinbase’s move is splashy, it’s apples to oranges for us in the private fund world.
First off, let’s level-set on why Coinbase’s exodus grabbed attention. They’re a public company, navigating SEC scrutiny and potentially, the kind of high-stakes drama that can come with billions in market cap. Texas lured them with its new Business Courts, which are only just more than a year old. They are specialized venues for complex disputes and is a classic case of states competing for corporate business.
While Delaware has quietly responded (SB 21, which provides more certainty to some areas of Delaware corporate law), that’s more applicable to public market boards, shareholders and directors. For private funds, Delaware’s edge isn’t about avoiding headlines; it’s about the ‘unsexy’ stuff that keeps your current LPs sleeping soundly and keeps the door open for your potential ones.
Part of that is the state’s famed Court of Chancery, the legal backbone for corporate Delaware. It has centuries of case law (the first Chancellor was William Killen way back in 1793) on fiduciary duties, investor rights, and governance, meaning outcomes are fast and predictable. In private funds, where LP agreements can get twisty with carried interest waterfalls or side letters, that certainty is what capital allocators find most attractive. Imagine a dispute over an allocation: Delaware’s precedents give everyone a roadmap, which makes for lower legal bills (a relative concept, admittedly) and drama. And then, no juries means no wild cards; just expert rulings that protect both LP and manager downside.
There’s another perceived benefit that investors like about Delaware, which is that LPs almost expect it because familiarity breeds comfort. The LPs that have internal lawyers probably have them versed in Delaware law and the investors that are less likely to – family offices small to mid-sized RIAs, HNWI’s – can easily fine one who is. It’s the ‘lingua franca’ of high-net-worth commitments.
And it’s not just the LP benefit. Flexible structures that let GPs tailor economic rights, eliminate certain fiduciary duties via agreements, and issue series trusts for segregated assets (without the red tape) make Delaware a natural home for onshore private funds.
Additionally, the state’s same-day filings and pro-business ecosystem mean you can launch faster. And privacy – Delaware keeps officer and director names off public rolls unless you opt in which is a benefit for funds who want to stay off the radar of their competitors or peers.
And then the taxes – or lack of them.
This is starting to come across as a sales pitch for Delaware now, so I’ll hit the brakes. But I guess the main thing I want to flag is that despite the headlines, Delaware remains the gold standard for onshore private fund formation in the US at the moment. The bottom line for any manager launching a new fund is that they need to give themselves the best possible chance of casting as wide of a capital raising net as possible; hedge funds so that they get to a sustainable operational AUM as soon as possible, private markets investors because they need to get deals done.
There are other states where you see fund launching activity – Nevada, of course – and Delaware isn’t for everyone.
But at the moment, it is for most.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
Fundviews Capital is a full-service end-to-end Fund Management Platform. Our platform provides a complete end-to-end solution for asset managers or wealth managers to structure, launch, operate and grow their professional investment funds. You can launch a fund in a matter of weeks, not months, and with minimal capital outlay – not only reducing the risk of launching a fund but also maximizing your chance of success. Once launched, you will find that a dedicated team of professionals is just a phone call or email away at all times, handling all aspects of the back and middle office for your fund.