Understanding the key differences between funds and joint ventures

Funds and Joint Ventures (JVs) are commonly seen in domestic and cross-border M&A transactions and although the terms ‘Fund’ and ‘JV’ may be used interchangeably at times, they are, however, distinct legal structures.

In this article, we will explore some key distinctions between a Fund and a JV, why such distinctions are important, and which structure may be most suitable to adopt in a given transaction.

Why does the distinction matter?

Although Funds and JVs both involve pooling capital in a corporate entity to be deployed for a commercial goal, they differ significantly in how control is exercised and the governance and compliance frameworks they operate within. Understanding the features of each structure can help stakeholders to structure transactions to achieve their commercial aims.

What are some key differences?

A distinction between Funds and JVs lies in the degree of stakeholder control. In a JV, all participants typically retain an active role in the management of the venture, either through day-to-day decision making or at a more strategic level, such as approving budgets or business plans. This hands-on approach is particularly suited to sectors like real estate development, where parties may have joint responsibility for the success of the venture, even if one has particular development expertise and the other provides the bulk of capital for the development. Conversely, in a Fund, the stakeholder that provides the investment (typically the limited partner, as Funds are usually structured as limited partnerships) cannot take an active role in the day-to-day running of the Fund. Typically, it is for the manager (in the role of general partner in the Fund) to utilise the capital and implement the agreed strategy, with no control rights afforded to the limited partner.

Another distinction is in how each entity typically raises capital. In a Fund, the manager raises capital from external investors, creating a clear divide between the entity raising capital and those investing in it. JVs, by contrast, tend to emerge from a shared initiative among known parties. The parties involved are often both the originators of the venture and the contributors of capital, with no external fundraising typically involved.

This distinction can be important under UK law, where the Alternative Investment Fund Managers Directive (AIFMD) applies to structures that meet the definition of ‘alternative investment fund’ set out in that directive. Those include collective investment undertakings that “raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of these investors” (reg. 3, AIFMD) JVs are not typically caught by the AIFMD (the preamble to the AIFMD expressly states joint ventures should not apply to them) but the application of AIFMD will always depend on the substance of the JV or Fund and whether it meets the tests set out in the AIFMD. Being clear on the substance, rather than the ‘label’, of any entity is essential to understanding the regulatory regime which will apply to it.

Despite these differences, Funds and JVs often appear in the same transactions or industries, share common terminology and can also be set up through the same type of legal entity. This can all lead to presumptions of their similarity. However, as noted above, it is the underlying structure and governance arrangements which determine whether you are dealing with a Fund or a JV and, therefore, the relevant regulatory regimes (such as AIFMD) and operational flexibilities that apply. Clarity on this subject at the outset can help avoid compliance pitfalls and ensure an appropriate entity is selected which aligns with strategic goals.

Which should you choose?

Whether a JV or a Fund is the best structure depends on your objectives, risk appetite, and desired level of control. If you’re seeking a hands-off investment with regulatory safeguards, a Fund may be the right fit. If you prefer active participation and bespoke structuring, a JV could be more suitable.

Conclusion and our experience

Distinguishing between a JV and a Fund is more than semantics. Whilst, as in all areas of law words matter, the most important elements in determining the identity of a structure will be the found in the definitive constitutional documents. When explaining to legal advisers what you are looking to achieve, rather than assume that the structure is a Fund or a JV, describe in detail how you envisage things like fund raising and governance will happen. Then your advisers will be able to guide you down the path of a Fund or a JV

Burges Salmon’s Corporate Real Estate team have in-depth experience in establishing and acting for JVs and also in setting up and acting for people looking to invest in Funds.

With a team of Built Environment lawyers qualified across England, Wales, Scotland and Northern Ireland, we support clients on real estate matters across jurisdictions and project types. Our Corporate Real Estate team works closely with colleagues in construction, planning, tax, litigation, environmental and finance to provide integrated support throughout the lifecycle of real estate assets, whether they are held in Funds or JVs or otherwise.

We have experience across many sectors including logistics, hospitality, office, residential (including build-to-rent and student accommodation), and large-scale regeneration schemes.

If you would like to explore any of the topics discussed above, please contact Jonathan Cantor (Partner, Corporate and M&A) George Robinson (Associate, Corporate and M&A) and Ceren Ghanem (Solicitor, Corporate and M&A).