Provisions GP Should Make for Follow-on Investments

Ilya Alkhimov, Svetlana Kotka

May 27, 2021 — 1 min read

Explanation

It may be necessary or desirable to make follow-on investments in a portfolio company (e.g., for the fund expansion plans or for the refinance a poorly performing portfolio company).

The ability to make a follow-on investment in a successful portfolio company may create a conflict of interest if GP manages more than one fund that has invested or in case GP or its partners have invested directly in the portfolio company.

Recommendation

The fund's articles of association should have special provisions for follow-on investments by the fund in a portfolio company. This may include GP retaining or recycling an appropriate amount of capital, drawing down commitments as required or making appropriate follow-on investments as required after the end of the investment period. The way such follow-on investments will be managed should be clearly set out in fund documents.

Decisions on such follow-on investments should be made with the same rigour and in the same manner as the original decision on the investment.

Such decisions should be supported by adequate written evidence showing a clear benefit to the fund in making the follow-on investment and that the decision is supported by the fund's policies.

Any conflict of interest arising from the possibility of a follow-on investment should be resolved in accordance with the conflict of interest resolution procedures of GP. Due to the inherent conflict, it is generally not advisable for follow-on investments to be made by a fund other than the one that made the original investment (although in certain cases this may be possible on a fully transparent and agreed basis with robust safeguards).

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