How to Boost Fund Distribution with Tracker Certificates

This newsletter is part of The Assetizer, GenTwo's thought leadership platform.

The VC  fund management industry runs on brand. If you are Andreessen Horowitz or Sequoia, distribution is not really a problem — LPs come to you, endowments compete for allocation, and your name does most of the selling.  

But the vast majority of funds are not Andreessen Horowitz. They have strong strategies, real track records, but no army of salespeople. For them, getting in front of the right investors — and more importantly, getting into the systems through which those investors actually buy things — is one of the hardest problems in the business.  

Tracker certificates are one way to solve this problem, and we see more and more of our fund clients making use of them. To illustrate this, we recently held a webinar with one of those clients, Loyal VC, to take a closer look at the issues and how their tracker addressed it.  

Below are four takeaways that stood out to me.

The gatekeeper problem — and how getting on shelf sidesteps it

Loyal VC is an eight-year-old evergreen venture fund with almost 500 portfolio companies and a genuinely differentiated investment approach.  

They have done well selling their fund one investor at a time, through personal networks, building to over 250 individual LPs over the life of the fund — a base heavily concentrated among INSEAD alumni and other insiders who already knew and trusted the founders.

But when they went to raise capital from institutional investors, the response was, to put it mildly, instructive. One of Loyal's managing partners recalled an analyst, after a thorough review of the fund, delivering this verdict: "Really great approach to investing. I really think it's going to make money. I haven't seen anyone else doing venture like this. But it's going to be too hard for me to explain to my investment committee. I'd have to use up all my political capital to just bring this in front of them."

The underlying dynamic, as Loyal's managing partners described it, is essentially a classic agent-principal problem. "The agents who work for the institution are worried about losing their job if they take a risk. You don't get fired for investing in BlackRock."  

The tracker didn’t so much change the investment committee’s risk appetite as the nature of the ask. Instead of requiring a gatekeeper to champion an unfamiliar fund structure to a skeptical committee, a private banker can now simply buy a security on behalf of their client — something with an ISIN, something that fits existing systems, something that requires no special explanation.  

A tracker can change more than your distribution — here's what to prepare for

When Loyal began the process of issuing a tracker, they assumed the hard part was structural. It turned out the harder part was operational. Their original fee model charged carried interest on exit — a structure they had designed deliberately, on the grounds that performance fees should reflect what investors actually received, not interim NAV movements. "We had always thought, oh, we're entrepreneurs, we'll do it differently. Let's do this. It's better for the investor," recalled the Loyal team.

This approach won’t work with a tracker. When a major private bank subscribes as a single institutional unit on behalf of multiple underlying clients, the fund manager loses visibility into who those investors are and when they came in or went out. As the Loyal team explained: "Julius Baer subscribes to units of the fund. We don't know which of their clients is subscribing, so we could no longer do that." The exit-based carry model, however investor-friendly in theory, couldn't survive contact with the banking system's plumbing.

The solution was to create an entirely new share class — one with a conventional quarterly high-watermark fee structure — specifically for the tracker. "We realized there are reasons why it's done the traditional way," Loyal's managing partners acknowledged. The lesson for other fund managers is straightforward: treat the tracker process as a product design exercise, not just a distribution exercise. Go in expecting to revisit your fund terms, not just your marketing materials.

Building a European presence — without building a European fund

Switzerland was already a meaningful market for Loyal before they issued the tracker — roughly 20% of their individual investors were Swiss. But those investors were coming in the hard way. As Loyal described it: "I have to come to you directly, sign your subscription agreement, work with your fund administration. This is a headache to do. And oh, by the way, I'm doing this despite my banker, because now I'm doing something that my banker isn't really managing."

A natural alternative would have been to establish a European fund entity — a Luxembourg SICAV or similar — that would give them a locally registered product with full access to EU distribution channels. They looked at it seriously. "Our alternative to the tracker structure would've been to set up and register a Luxembourg entity ourselves, go through all the hoops, all the cost of replicating all the legal," Loyal's managing partners explained. "It's just much more cost efficient to work with someone like GenTwo to build the tracker than it is to actually set up a second fund entity with all of the necessary legislation and qualifications needed in a market like Europe."

The tracker achieved the same distribution outcome at a fraction of the cost and complexity. A GenTwo-incorporated SPV subscribes into the Loyal fund, and the resulting certificate carries an ISIN compatible with Swiss private bank platforms. The 20% of investors who were previously navigating a manual, banker-bypassing process can now simply call their bank. For any non-European fund eyeing Swiss or broader EU private bank distribution, the build-versus-buy calculus is worth running carefully before defaulting to the Luxembourg route.

Why the ISIN is the unit of currency in private bank distribution

Ask Loyal's managing partners how they explain the tracker structure to a potential investor who has never encountered one before, and the answer is revealing in its simplicity: "It's like a mutual fund." From the client's perspective, the tracker is essentially transparent. "They care that they're buying the underlying performance of Loyal VC," the team noted. "They don't care if they're buying it through a direct investment in Loyal or through a tracker which then buys units of Loyal. They're still ending up with the same asset. You don't even need to explain it's a tracker."

That invisibility is the point. Private bank distribution runs on a simple logic: if an asset has an ISIN, a banker can buy it for a client. If it doesn't, the conversation gets complicated. Bank systems, client account statements, compliance and onboarding processes — all of it is organized around ISINs. Without one, a fund is asking banks to make exceptions, something banks are generally reluctant to do. As Loyal put it: "From the banker's point of view, they want the asset to show up within their existing systems — to be able to just print out the client's account which includes all the client's assets."

GenTwo's Goran Gusic framed the broader logic as clearly as anyone: "What is a tracker? It's really replacing the contractual agreement between the GP and the LP with an institutionalized solution — with a security. And that does make life easier for pretty much anybody involved, be it the GP or the LP on the other side."

Tom Lyons, GenTwo

About the Webinar

This piece draws on Boosting Fund Distribution with Tracker Certificates, a GenTwo webinar held on [date]. The session combined a technical explanation of how tracker certificates work with a live case study from Loyal VC, covering everything from the mechanics of issuance to the practical realities of getting a fund onto private bank platforms — including the trade-offs and surprises along the way.

• Kamal Hassan - Managing Partner, Loyal VC
• Michael Kosic – Managing Partner, Loyal VC
• Goran Gusic - Head of UK, GenTwo
• Moderator: Tom Lyons - Head of Communications, GenTwo

More on Loyal VC at: www.loyal.vc.