Special Considerations When Establishing, Investing in, and Managing a Fund

Explanation

The obligations of a fund's GP and LPs to each other, portfolio companies, stakeholders and the public at large are fundamentally the same as for other types of private equity investments. The difference lies in the greater likelihood that the actions of the GP will affect stakeholders and attract public attention, and that their ongoing processes will be subject to broader scrutiny.

Recommendation

GPs of such funds should be aware of the heightened legal, reputational and other risks and carefully describe to potential LPs the particular risks associated with the asset class. In turn,

LPs should carefully consider a potential GP 's ability to effectively manage relationships with stakeholders, the public and regulators in what may be a particularly challenging environment.

Parties investing in distressed assets should be prepared for their decisions and actions to be challenged by a variety of stakeholders, both those directly affected by such decisions and actions and a larger group of external parties. A detailed understanding of the legal rights and obligations of all parties involved is essential, including directors and others who make decisions on behalf of the portfolio company.

It is important to clearly assign responsibility for handling these legal issues and to be aware of the wider issues in relation to any decisions made.