The fund documents should set out the key terms and conditions and provide the framework within which GP will operate the fund.
The minimum requirements for fund documents will depend heavily on the jurisdiction and applicable regulatory requirements and should therefore be reviewed by legal counsel.
It is recommended that fund documents address, at a minimum, the following issues:
- The investment scope of the fund;
- The fund's investment policy, investment criteria and investment timeframe, including applicable investment, lending and borrowing guidelines and investment restrictions.(NB: These need to be set out particularly clearly as these important matters are often not set out in detail in other key documents, and are usually incorporated by cross-reference to the private placement memorandum);
- The responsible investment approach of the GP and/or the fund and the procedures for ensuring compliance with all related policies.
- A description of the management structure and management team and identification of the key executives of that team;
- A description of the skills and experience of the team;
- Details of continuity, dynamics, decision-making processes and succession within the team.
Structure and powers
- A description of the legal structure of the fund;
- A summary of the powers of the GP;
- Procedures for resolving conflicts of interest;
- Terms of reference and composition of the LPAC;
- Key Person provisions governing the departure of key management personnel (e.g., requiring GP to cease making new investments when key personnel are no longer available to make key investment decisions);
- GP removal provisions (e.g., in cases of fraud, negligence, etc.);
- Transfer provisions for GP and LP shares;
- Indemnity provisions.
- A summary of the key reports on the fund provided to the GP for LPs;
- Their frequency (e.g., quarterly reports, semi-annual reports, and audited financial statements);
- The timetable within which they will be distributed to LPs;
- The valuation principles to be used in these reports;
- Disclosure and detailed breakdown of the nature and source of all fees paid directly or indirectly by portfolio companies to GP and/or its affiliates/persons (such as employees, operating partners, consultants or the like);
- Other reports, e.g. those covering ESG matters or those required to comply with tax and other regulatory obligations.
- The establishment costs of the Fund, the expenses to be borne by the Fund (and any cap thereon) and the expenses to be borne by GP;
- Terms of the management fee (including the timing of its commencement) and the differentiation between the costs borne by the fund and those borne by GP;
- Provisions dealing with fees received by the GP or its related parties from portfolio companies and the extent to which such fees received are offset against the management fee or otherwise credited to the fund, and any other fee and expense allocation provisions necessary to ensure that LPs have a reasonable understanding of the fees and expenses being charged(taking into account any regulatory requirements, e.g. under the AIFMD);
- The GP capital commitment;
- Carried interest arrangements, including the interest rate, basis of calculation, catch-up, escrow, claw-back and true-up provisions;
- Mechanisms for drawdowns and in the event that LP such drawdowns do not occur (which should normally provide for significant penalties in the event of a default to mitigate the risk of such a default);
- Pricing of units, shares, etc. in the fund (if applicable);
- How distributions to LPs will be made.
- The allocation policy for co-investment opportunities, including disclosure of any senior co-investment rights;
- Policy regarding co-investments with other funds managed by GP or any of its affiliates.
Term and new funds
- Term of the Fund, the procedure for renewing the Fund and the procedures for terminating and liquidating the Fund;
- Circumstances under which investments may be purchased from or sold to other funds managed by GP or its affiliates; and GP or its affiliates;
- Any restrictions on the circumstances in which the Fundraising Team or GP is permitted to establish another fund with a similar investment strategy or objective.
- A summary of the risk factors relevant to investing in the fund, including a general warning to LPs of the risks associated with investing in such funds and also any particular risk factors that may affect the fund's ability to implement its investment policy or achieve its return objectives.
- An overview of the Fund's tax structure and key considerations for investors in the Fund.
- In certain jurisdictions, regulation may require detailed disclosure about certain aspects of the fund's investment mandate and ongoing operations.
- A summary of the main restrictions on who can invest in the fund in the main jurisdictions where the fund is marketed.
Fund documents (private placement memorandum or similar and formation documents) should be prepared and provided to LPs in sufficient time to allow them to review these documents prior to closing and to allow time for negotiations with GP. Appropriate underwriting documents and certificates of participation should also be circulated. The fundraising team should seek advice as to whether any further legal or regulatory issues need to be addressed under the law of the jurisdiction to which the documents are being sent.