Pearl Fund, non-real-estate opportunity zone fund, joins fundraising fray

  • Why this is important: Non-real-estate funds are figuring how to cash in on opportunity-zone benefits

Pearl Fund, a venture capital-focused opportunity zone fund, is targeting $50 million to invest in early-stage companies.

The fund will focus on technology in opportunity zones in New York, northeast Pennsylvania and northern New Jersey.

Brian Phillips, promoter of Pearl Fund, is a serial early tech entrepreneur. He founded Information Technologies Group and sold it to management in 1987; and Tonic Software, which was acquired by Altiris and subsequently became part of Symantec in 2007.

Pearl Fund will leverage the work of local incubators to seek opportunities to invest in, Phillips said. It will also build out its own incubators to foster collaboration, he said.

The fund will invest in 25 to 50 early-stage businesses that will have the potential to generate at least 10x returns, Phillips said.

Pearl Fund will take significant ownership or board seats in businesses. It could even take an operating role until a suitable team is recruited, he said.

Minimum investments in the fund would be $250,000 from high-net-worth individuals and $1 million from firms and family offices.

Designing a QOF

The Tax Cuts and Jobs Act of 2017 established opportunity zones to provide tax breaks to investors. Private investors can roll their capital gains into a qualified opportunity fund, which must invest at least 90 percent of its assets in opportunity zones to defer the tax.

Capital-gains tax is eliminated if an investment is held for 10 years. In addition, investors may also receive tax benefits on additional gains earned from the qualified opportunity fund.

Most opportunity zone funds like Cresset-Diversified QOZ Fund and CIM Opportunity Zone Fund focus on real estate. Only a handful of opportunity zone funds, like Pearl Fund and Loyalty Fund, are attempting to raise non-real-estate-focused OZ pools.

For instance, Loyalty Fund, raised by John Hewitt, is targeting $5 million to $25 million and will invest in new financial-services franchises focused on the Hispanic/Latino community in opportunity zones.

While the opportunity zone fund is more suited to real estate, the upside for investors in a riskier venture-capital-focused OZ fund is significant, Phillips said.

The fund is designed as a blind pool but has elements to ensure the fund follows Treasury guidelines, he said.

For instance, the fund will utilize capital calls of specific maximum amounts every 30 to 60 days through the next 12 months to try and help each investor meet their 180-day window in which they must invest their capital gains.

As of now, there will be a separate Pearl Fund each calendar year to optimize the LPs’ 10-year tax window, he said.

Action Item: Read more on Pearl Fund here