Typically these aspect letters are borne of necessity for the investor to enter into the fund, both on account of regulatory necessities or to commitments it has to different events (resembling its personal buyers). Different instances these aspect letters are the results of the investor attempting to barter a greater deal for itself. Not all buyers are created equal and a few have the leverage to demand aspect letters with sure phrases, whereas others don’t.
Whether or not it makes monetary sense for a fund to consent to a request for a aspect letter is in the end a enterprise resolution, however it is very important perceive the authorized issues that come up in reference to such a request. Agreeing to some kinds of aspect letters carry the chance of litigation from the opposite buyers or enforcement actions by securities regulators.
Frequent Aspect Letter Requests
The most typical aspect letter request is for a partial or full waiver of the fund supervisor’s charges (both the administration price, efficiency price/carried curiosity, or each) for the investor requesting the aspect letter. One other frequent request is for a rest of the lock-up necessities for the investor, which give that investor the suitable to withdraw his or her funds at an earlier date than different buyers. Different aspect letter requests may embrace granting extra entry to the investor to details about the fund. Lastly, some buyers might want “Most Favored Nation” (MFN) clauses which basically give these buyers the suitable to acquire any profit bestowed on different buyers by way of a aspect letter.
Authorized Dangers of Aspect Letters for Fund Managers
For a lot of fund managers, particularly these early of their careers, acquiring capital and new buyers is the largest problem, and so the temptation is nice to accede to aspect letter requests from buyers which might be keen make a big funding within the fund. This may be very true when the investor is demanding the aspect letter simply previous to closing and will have the fund managers over a proverbial barrel. There are a number of dangers that needs to be stored in thoughts when negotiating and drawing up such agreements.
First, it is very important perceive that, as soon as a aspect letter has been entered into, the fund supervisor now has two doubtlessly competing units of obligations: its obligations to all restricted companions underneath the restricted partnership settlement and its obligations to the actual restricted companion by way of the aspect letter. Usually, within the case of a battle, the provisions of the aspect letter govern. Typically, a fund supervisor is completely in a position to stability these issues. For instance, within the case the place a supervisor waives its price with respect to a specific investor, there’s usually no vital subject, as a result of that price waiver doesn’t negatively impression the opposite buyers. The fund supervisor can cost the price disclosed within the non-public placement memorandum and restricted partnership settlement to the opposite buyers, whereas additionally waiving that price with respect to the investor that requested the waiver.
Nonetheless, different frequent aspect letter preparations do trigger potential authorized points for fund managers. For instance, permitting an investor with a aspect letter to exit the fund early may trigger the fund supervisor to face a declare for breach of its fiduciary responsibility to the opposite buyers, as a result of they might declare that they had been harmed by the aspect letter. In a state of affairs the place the fund is unable to satisfy all the requested redemptions, the buyers that would not have a aspect letter permitting for an early withdrawal are at an obstacle, as a result of the buyers that do have such a aspect letter might have drained the liquidity from the fund by the point the opposite buyers are eligible to request a redemption.
Likewise, aspect letters that grant a specific investor further info the opposite buyers usually are not aware of could also be acceptable in sure circumstances. Nonetheless, if the extra entry to info can be utilized by the investor to find out when they need to make a redemption request, then such rights might drawback the opposite buyers, resulting in litigation by these different buyers later.
As well as, the Securities Trade Fee and state securities regulators may and infrequently do convey claims in opposition to fund managers based mostly on the identical issues. They could argue that the fund supervisor failed to satisfy disclosure and transparency necessities by not adequately notifying potential and current buyers of the aspect letter obligations or that fiduciary duties owed to the buyers had been violated when the fund supervisor agreed to a aspect letter with an investor that deprived the opposite buyers.
Greatest Practices in Coming into into Aspect Letters
Whereas fund managers might face an unlimited temptation to grant aspect letter requests, they need to train due consideration and care in what requests they grant and the way they grant them.
The fund’s restricted partnership settlement and personal placement memorandum ought to embrace language that alerts buyers to the likelihood that the fund many grant aspect letter requests to explicit buyers.
Fund managers must also make it possible for they don’t enter into any oral aspect letters. All agreements to differ the phrases of the restricted partnership settlement needs to be in writing. Typically the buyers requesting the aspect letter will insist on this anyway, however it’s necessary for fund managers to not make guarantees loosely.
When assessing either side letter request, crucial concern for fund managers is to find out whether or not the phrases of the proposed aspect letter impression their fiduciary duties to different buyers. This dedication needs to be made in session with the fund’s authorized counsel. When the phrases of the aspect letter don’t impression different buyers, they could usually be entered into with out disclosing the phrases to different buyers. When different buyers are impacted, it’s doable that the disclosure of the phrases of the aspect letter to the opposite buyers could also be adequate to handle such issues. Extra usually, the fund supervisor ought to search the consent of the opposite buyers to the association or not enter into such association in any respect.
As well as, cautious consideration should be given to fund managers to what different obligations are triggered by getting into into aspect letters. For instance, these different buyers with MFN standing might must be promptly knowledgeable of a aspect letter and provided the identical advantages.
By working with fund authorized counsel to draft and negotiate aspect letters which might be in accordance with the restricted partnership settlement, fiduciary duties, disclosure necessities, and different authorized issues, a fund supervisor can restrict the potential for a aspect letter to trigger issues later down the street.
© 2017 Alexander J. Davie — This text is for common info solely. The data introduced shouldn’t be construed to be formal authorized recommendation nor the formation of a lawyer/consumer relationship.