Successful fund managers focus on reducing risks throughout all stages of a fund’s life cycle, and a fund wind down is no exception.
The primary goal is clear: preserve and maximize the fund’s value. However, the long and winding road to that objective is filled with complexities. If fund managers fail to plan and execute properly, they can face financial, operational, and legal issues that damage their reputation.
For an effective fund wind down, it’s critical to carefully manage asset liquidations and transfers, retain key personnel and minimize expenses. To help fund managers navigate this complex process, we created the following guide with important steps to maximize investors’ capital and mitigate risks during a fund wind down.
How Third-Party Advisors Can Help Ensure a Smooth Process
Because fund managers concentrate on the day-to-day priorities required to manage a fund and serve investors, they may lack awareness about the array of problems that can arise during a mishandled wind down. By enlisting the guidance of third-party advisors who are skilled in this process, fund managers can mitigate legal and regulatory headaches.
When managers work with skilled legal and financial advisors, it helps reassure investors that their capital is being managed responsibly and without bias. In addition, trusted third-party advisors bring a high level of attention to detail. This is essential for handling the complexities of fund wind downs and ensures deadlines are met for all required legal, filing, reporting, and financial actions.
Blueprint for Success: A Thorough, Methodical Approach
When a fund manager decides to initiate the wind down process, a comprehensive plan must be developed and executed to preserve the best interests of investors, as well as the firm’s reputation. Here are some essential steps for a comprehensive process that reduces risk:
- Determine available valuation, legal, financial, and insurance resources
- Fully document all deliberations, decisions, and activities from initial plan to final shut down, consulting legal advisors for review and counsel
- Thoroughly analyze the fund from legal, financial, and operational perspectives
- Estimate operating expenses and dissolution costs, identify contingent liabilities, and prepare a wind down budget
- Prepare a plan with a timeline
- Notify investors, portfolio companies, advisors, brokers, auditors, and third-party service providers
- Realize remaining assets and transfer remaining portfolio to a liquidating trust, if needed
- Establish escrow to cover bills and fees not evident at wind down
- Prepare final capital account statements, report and file liquidating financial statements
- File tax returns and issue K-1s
- Cancel registrations, complete filings
- Close bank and brokerage accounts, secure escrow or trust as needed
- Distribute cash and assets
Liquidation Considerations to Reassure Investors and Regulators
To help create a liquidation process that satisfies both investors and regulators, keep these guidelines in mind:
- Determine trading or sale restrictions. Although fund managers can’t anticipate all risk factors and obstacles, this is one area where managers can anticipate potential issues and plan ahead to address them
- Analyze the portfolio’s components, terms, obligations, and liquidity to reach fair valuation and guide the plan for the disposition and transfer of holdings
- Anticipate a timeline for liquidation and transfer of assets. Because investors expect transparency, they want to know how much cash they’ll receive and when they can expect to receive it
- Carefully review all subscription, offering, and governance agreements and documents to ensure compliance
Ensure Clear Communication for Investors
During the wind down process, investors require transparency and want to stay informed from start to finish. A lack of clear communication can strain the relationship between the fund manager and investors. To help reduce investors’ concerns, fund managers can take steps to execute a well-developed communication plan:
- Designate a communications manager
- Communicate with investors regularly. Set expectations for investors by being clear about the frequency of communications you will send and what form they will take (email or some other means)
- Keep investors up to date if circumstances change during the wind down. Convey those changes in a prompt manner and share with all investors at the same time.
Document Review: A List That Demands Attention
The wind down process involves a long list of documents that must be executed properly to ensure requirements and deadlines are met. Here are some of the documents that must be carefully reviewed and evaluated:
- Fund governance documents, articles of formation and incorporation, and registrations
- Subscription agreements, side letters, and distribution agreements
- Investor documents and communications
- Signatory and trading authorizations
- Third-party advisor agreements, insurance policies, and indemnifications
- Private placement memoranda and meeting minutes
- Financial and brokerage documents and statements
- Public and private authorities' reports, filings, and communications
Execute a Wind-Down Plan with Consistency
An efficient and consistently thorough fund wind down requires attention to many operational, regulatory, and financial considerations, including documentation requirements and managing investors’ expectations.
By enlisting the expertise of legal and financial advisors, fund managers can help ensure an orderly process. Third-party advisors can bring an unbiased approach to planning and execution, which prevents conflicts of interest and helps reduce the likelihood of litigation. With an orderly wind down, firms can protect their reputation in the eyes of investors, regulators, and other business partners.
Looking for additional ways to identify and mitigate wind down risks? Reach out to a member of the STRAIT team to learn more about how we help clients ensure an orderly wind down process.