A fund manager typically spends most of its time not only contemplating how to maximize returns for investors, but also navigating the array of compliance and regulatory concerns involved in running a private fund. Because the manager is so caught up in thinking about these daily considerations, it may lose sight of the multitude of issues that arise when it comes time to wind down that same fund. If the manager exercises some foresight regarding the fund’s eventual wind-down and puts proper procedures in place, however, the whole process can be both smoother and less fraught with legal and regulatory risks. Once a manager decides to wind down a fund, it must navigate myriad considerations and decisions during the process. The manager needs to disclose the wind-down to investors at the outset without triggering liabilities to service providers or diminishing asset values, and the fund needs to retain appropriate personnel and working capital to perform a wind-down that could take months or even years to complete.
The biggest pitfalls in closing a fund include:
- Be aware that the wind-down will be played out publicly, and try to anticipate the reaction of the public, press and investors as much as possible when planning the wind-down.
- Make sure you have continuity of employees who will manage the process and who can address the essential elements that are required.
- Remember that during the wind-down process, you are still a registered investment adviser with specifically enumerated obligations to the fund.
- Err on the side of providing more disclosure to investors about what you’re doing and why, because that will help reduce friction as the process unfolds over time.
To address these and other issues that arise when winding down a fund, I was recently interviewed by The Hedge Fund Law Report. The first article in a two-part series presents thoughts on the factors leading to the decision to wind down a fund, which personnel should lead that process and how it should be disclosed to investors and service providers. Winding Down Funds: How Managers Make the Decision and Communicate It to Investors and Service Providers (Part One of Two) The second article explores what types of fees and expenses investors should be charged during the wind-down, as well as how managers can maximize the value of illiquid assets during a liquidation. Considerations When Winding Down Funds: Navigating Illiquid Assets, Unanticipated Windfalls and Fees and Expenses During Liquidation (Part Two of Two).
Michael C. Neus is a Senior Fellow in Residence with the Program on Corporate Compliance and Enforcement at New York University School of Law and former Managing Partner and General Counsel of Perry Capital, LLC.
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