Small-cap alternative investment funds continue to attract sophisticated managers drawn by the promise of market inefficiencies, high growth potential, and lean execution models. For professional clients and eligible counterparties, small-cap equities—typically firms with market capitalisations between £50m and £500m—offer the prospect of outsized returns, under-the-radar opportunities, and agile capital deployment. In 2025, these characteristics are particularly attractive to boutique asset managers, family offices, and newly independent PMs seeking performance away from the increasingly crowded institutional lanes.
Whether you’re spinning out of a larger firm, testing a niche investment thesis, or building a permanent capital vehicle, the pathway to launching a small-cap AIF in the UK is well-trodden, though still nuanced. Here’s a step-by-step guide to structuring, registering, and scaling a compliant and competitive fund.
1. Define the structure
The first foundational decision is legal structure—and it’s one that will shape how the fund operates, how it’s marketed, and how it’s perceived by investors.
- Common structures include limited partnerships (widely used for closed-ended funds), unit trusts, and corporate structures such as OEICs. Your choice here impacts regulatory obligations, tax treatment, investor familiarity, and operational mechanics.
- Open-ended or closed-ended: Open-ended funds allow for fluid investor subscriptions and redemptions, but require liquidity management. Closed-ended structures, preferred for small-cap strategies, typically offer better portfolio stability and alignment with longer-term investment horizons.
It’s important to take professional advice on structuring early—undoing structural choices later can be both costly and disruptive.
2. Appoint key parties
An AIF is only as strong as the team behind it. Beyond portfolio management, a number of specialist roles are required to meet regulatory and operational obligations.
- Alternative Investment Fund Manager (AIFM): A fund must be managed by a suitably authorised AIFM. This can either be your own firm (requiring FCA approval), or a third-party provider via a regulatory hosting arrangement. Each has implications for control, cost, and complexity.
- Depositary or depositary-lite: UK AIFs over certain thresholds must appoint a depositary to oversee asset safekeeping and cash flow monitoring. Smaller funds may qualify for the depositary-lite regime, offering reduced obligations and fees.
- Administrator, custodian, and auditor: These roles support daily operations, NAV calculation, asset security, and statutory reporting. While outsourcing is common, careful selection is crucial to ensure quality and responsiveness.
- Legal and tax advisors: Bespoke structuring, cross-border distribution, and investor documentation all require targeted professional advice. Working with a law firm experienced in fund formation is especially important during the early drafting stage.
The right team doesn’t just ensure compliance—it also instils investor confidence from the outset.
3. Regulatory authorisation
Running an AIF in the UK brings regulatory responsibilities. Before marketing or managing capital, you must ensure the fund and its manager are appropriately authorised or registered with the Financial Conduct Authority (FCA). The route you choose will depend on your resources, timelines, and strategic ambitions.
The direct authorisation route
Firms opting to establish their own AIFM must undergo a full FCA authorisation process. This includes submitting a Regulatory Business Plan, governance frameworks, financial models, and proof of adequate capital and controls. It’s a comprehensive undertaking:
- Application costs can range from £5,000 to £25,000 depending on permissions sought.
- Legal and compliance advisory fees often run to £50,000–£100,000.
- In-house compliance is typically required, with hiring costs in the £70,000–£120,000 range for a qualified officer, plus any supporting RegTech systems they may require.
- Timelines can extend to 12–18 months, depending on the complexity of the application and the FCA’s backlog.
This model offers control and permanence but demands significant investment and long lead times.
The hosted route
An increasingly popular option—especially for emerging managers—is to operate under the umbrella of a third-party AIFM via regulatory hosting. Here, the host holds the necessary permissions and assumes regulatory responsibility, allowing you to focus on investment strategy and fundraising.
- Costs are generally lower, with onboarding fees typically starting from £3000 and annual fees ranging from £30,000 to £80,000.
- Ongoing compliance is embedded into the service, with access to experienced professionals who oversee regulatory reporting, monitoring, and governance.
- Speed to market is a key advantage, with launch timelines compressed to as little as 6–10 weeks.
While you trade some autonomy for efficiency, hosted models are ideal for testing new strategies, launching pilot funds, or building a track record before transitioning to full authorisation.
4. Register the fund
Once the manager is authorised, the fund itself must be registered with the FCA under the Alternative Investment Fund Managers Directive (AIFMD). This step is mandatory before marketing to professional investors.
- Fund registration typically involves AIFMD notifications under Article 31 (UK AIFs), Article 32 (EU AIFs marketed in the UK), or Article 33 (non-EU AIFs).
- Marketing to UK investors is carried out under the National Private Placement Regime (NPPR), with specific disclosure and transparency obligations.
For managers operating under a hosted model, much of this administrative burden is absorbed by the host, with registration managed as part of the onboarding process.
5. Operational setup
Beyond structure and authorisation, operational readiness is key to running a fund that functions smoothly and inspires investor trust.
- Fund documents: The Private Placement Memorandum (PPM), Limited Partnership Agreement (LPA), and subscription forms must be professionally drafted and reflect the fund’s strategy, fees, risk factors, and governance.
- AML/KYC systems: Anti-money laundering obligations are non-negotiable. Whether using outsourced administrators or internal staff, you’ll need clear policies for onboarding and ongoing due diligence. Hosted AIFMs typically offer standardised onboarding frameworks.
- Valuation and reporting: Small-cap strategies can involve illiquid or thinly traded securities, requiring clear valuation methodologies and robust reporting practices.
- Risk management: The FCA expects clearly documented processes for managing liquidity, leverage, and counterparty exposure. This is both a compliance requirement and an operational necessity.
Getting these systems right from day one builds operational credibility and reduces risk down the line.
6. Marketing and fundraising
Marketing an AIF in the UK is tightly regulated and must follow the FCA’s rules on financial promotions. This is particularly relevant when targeting professional investors.
- Eligible investors only: Marketing is restricted to professional clients, high-net-worth individuals, or sophisticated investors under clearly defined exemptions.
- Marketing materials: All communications—including pitch decks, one-pagers, and websites—must be fair, clear, and not misleading. If you’re working with a hosted AIFM, they will typically pre-approve or even assist in drafting compliant marketing collateral.
- Distribution strategy: Many managers work with placement agents or rely on existing investor relationships. Hosted platforms may also offer introductions or leverage their networks to support capital raising.
Fundraising is competitive—being clear, compliant and credible can make all the difference.
Starting a small-cap AIF in the UK is an attractive opportunity for experienced professionals seeking to create differentiated, high-performing investment strategies. With the right structure, team, and compliance framework in place, it’s entirely achievable—even within tight timelines or budgets.
If you’d like to find out more about how regulatory hosting could accelerate your AIF launch and reduce both cost and compliance burden, our team would be happy to talk.
