Many managers have a process in place for determining when a fund should dispose of one of its investments.
Many managers have a process in place for determining when a fund should dispose of one of its investments. Such decisions should be made by a suitably senior individual in the fund and follow the triggers set out in the original investment proposal.
Asset managers have an obligation to make distributions back to investors as required by the fund documentation. This is ultimately how investors see a return on their capital, so is an important step in the management of a fund.
Gen II can help asset managers process all investor related transactions, including capital call activity, distributions and transfers of interest.
Managers need to consider what will be distributed and how, including carried interest and waterfall calculations, distribution of losses, tax considerations and so forth. Further consideration should be given to the fund’s cashflow and how distributions affect available capital. These and any other distribution provisions should be outlined and made in line with the fund’s documents.
Distributions should be made in line with the fund’s documents, and should be considered in the context of liabilities including for tax, clawbacks, warranties and indemnities that may have been provided by the asset manager to investors, and any other contingent liabilities. Legal advice should be taken where the asset manager reasonably believes that making a distribution to investor would cause the fund to become insolvent.
This term refers to distributions made through the transfer of ownership of an asset rather than the distribution of the cash value of that asset. Whilst technically difficult to implement, it may be preferred by asset managers when cash isn't readily available, or where it’s more practical to transfer the asset itself. In specie distributions may also have tax ramifications, such as avoiding triggering capital gains tax. External advisors such as fund administrators can ensure that an asset is transferred to investors correctly and can advise about any tax considerations to keep in mind, throughout the relevant jurisdictions.
Sometimes it’s not possible to realise a fund’s maximised investment potential during the life of a fund. In those cases, managers may wish to extend the life of their fund in order to achieve this maximum return.
The fund’s documents usually contain procedures on the ways to extend a fund’s life and what (pre-agreed) period the fund will have its life extended by. In Europe, it is common for fund documents to be drawn up with the provision of two extensions of a year each, but it may be possible to extend the life of a fund further when required – for example, if the sale of the assets are likely to take longer than 12 months.
When an extension is sought, early consultation with the fund’s investors is prudent, as a particular percentage of investors will have to agree before the life of the fund is extended.
The details of a fund’s wind up and liquidation of assets is generally governed by the fund’s documentation. It can be tricky to wind up a fund.
When an investment manager wants to liquidate a fund, a plan to effect this is put into place, usually with the help of a fund administrator and legal counsel, who ensure the fund’s documentation, legal and regulatory framework are complied with, as well as other practical issues involved.
Fund administrators can help managers communicate effectively to their investors, and where required their regulators, about the assets that are being sold, the valuation of those assets, distributions and costs involved around the fund’s wind up. The manager may want to advise on timing of the sale of assets, and take into account any tax implications in conjunction with their external fund administrator. As with all distributions, correct calculation of the NAV and distributions net of fees is crucial.
Gen II has considerable experience of fund life extensions and wind ups and can help guide managers through their first, help with large numbers of funds or deal with many interconnected funds.