Why did partnership funds became so widely used? The pass-through nature is of course an important element, but if that is the sole benefit, then it is indifferent from just simply not establishing a fund. Below are some of the factors I can think of:
- Gathering multiple investors: A fund can gather many investors into one pool. It will make investment process much more cost efficient.
- Give strong power to the manager: Managers of investment funds tend to have more discretion and decision power compared to directors of ordinary corporations. This creates incentives for the managers to establish an investment fund.
- Anonymity: In some cases, the investors do not want to make their names known to the investee (or to the public, if the investment requires public disclosure). A partnership can intervene in between in such case and hide the names of the actual investors behind. But this does not work in some cases.
- Reputation: At least in Japan, investment funds have earned decent reputation as of now, and establishing an investment fund has become “cool” thing.