No fund manager wants to antagonise an investor unnecessarily. And yet they often do….
Here are three “unforced errors” which could be easily avoided.
At every industry conference I have attended there has been an investor panel session where deeply felt frustrations have been vented. There is, of course, an inevitable commercial tension between an investor and fund manager in settling the terms for fund participation. Where the balance is struck will, like all commercial negotiations, depend on the bargaining power of the parties. In the main, though, the issues which have caused the greatest tooth grinding have fallen outside this spectrum. What raise most ire are irritants perceived to be unnecessary or avoidable.
Here are three. They may seem obvious, but they come around all too often….
The flexibility that can’t be explained
Investors understand that in setting structures and investment and borrowing permissions managers will need some flexibility . However, where managers are seeking substantial carve-outs or discretions in general terms, they should be able to explain at a commercial level (even if they don’t want to be pinned down legally) the sort of situation when they think it may be useful to rely on these. “I thought it would be good to preserve flexibility” or even worse “my Counsel thought it would be good to be flexible” tends not to play well. Have examples ready. An illustration goes a long way.
Fund documents have to operate over long periods and often in circumstances not envisaged at the time of formation. Managers do need discretion to respond to changing circumstances. However they do not always need “absolute discretion”. There has been an observable trend in recent years for absolute discretions to creep in where they used not to be. Where absolute discretion is sought this is often to avoid scope for future challenge on the grounds of unreasonableness. A Manager may not want to set out its reasons to refuse a third party transfer for example. However, the test of “reasonableness” at law is not an especially high bar and before allowing fund counsel to go the wall to preserve an “absolute discretion” on a matter which is legitimately of significant investor concern (for example forced withdrawal) a Manager might pause and reflect. Would they ever wish to exercise that discretion without having a pretty good reason in the first place? Pick the battles you need to fight.
The urgent close that never comes
Even very large Investors do not always have vast internal teams. As well as reviewing fund terms, their teams may have complex decisions to make determining which investment vehicle to use. Investment Committees who need to sign off may be in far flung places and different time zones. In short, there can be much work to do between an investment being approved in principle and the completion of due diligence, submission of side letter requests and subscription documents. Investors will pull out the stops to get all this done for an imminent close BUT if they do this and then no reply is forthcoming for several days because the closing has slipped, it will rankle. Be honest on timing and if it slips pick up the phone.