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Fund management in times of crisis

Legal & Tax Updates: How does the Corona crisis affect GPs and their Funds? Questions & Answers.

With no end in sight, the Corona pandemic continues to have a vast grip on our lives. This crisis does not only change the way we work, it shifts priorities and with certainties diminishing, it boycotts the concept of planning. For many professions, however, strategic planning is the key to success. The result: they have to adapt, accept uncertainty as a co-worker and amend well-known processes on a continuous basis.

We are in no position to foresee the future either, but we can hopefully make your lives a bit easier. SMP partner Fabian Euhus and research assistant Adrian Heuzeroth have drawn up a Crisis Newsroom tailor-made to the needs of fund managers. Find answers to your questions here.

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Crisis Newsroom

Corona CrisisHow could the crisis affect the fundraising process? Your Business and Perspectives: GPs

It is likely that the fundraising process will be extended. The evaluation of the LPs will take longer or may be reconsidered.

It may be advisable to make a priority list of your potential LPs and to reach out to LPs that may be reconsidering their decisions. All LPs where the investment decision has passed the Investment Committee should now be in top of your mind and binding subscription documents should be sought.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisHow to adapt the conditions in these fundraising circumstances? Your Business and Perspectives: GPs

It may make sense to adjust the fund size and minimum fund size. An adjustment will influence three important parameters of the fund:

1. the available management fee

2. the coverage of organizational expenses

3. the portfolio construction model and diversification

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Dr. Fabian Euhus April 14, 2020 Corona CrisisWhich parameters of an existing fund could be adjusted? Your Business and Perspectives: GPs

An extension of the investment period may be considered. Unless foreseen in the fund documents, all LPs may have to be involved. LPs will most likely be re-negotiating terms, including management fees. Consideration may also be given to extending the term of the Fund to avoid unfavorable exits, again LPs will be negotiating terms, including management fees.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisWhat about GP commitments? Your Business and Perspectives: GPs

GPs may also have to reconsider their existing and future GP commitments.

Due to the crisis, existing funds may need more time to realize their investments and exit returns may be below pre-crisis expectation. In such circumstances GPs may want, or have, to finance GP commitments to later fund generations. When doing so existing fund documentation must be considered when discussing potential collateral with financing providers.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisWhat risks should a GP consider at the level of LPs? Speaking Capital: LPs

In times of major economic transformations, investor default is not unlikely. Investor default may be due to financing shortages at LP level, e.g. if an LPs underlying investors default or if the LP fails to raise funds as planned to honor the capital commitment. Also, an LP may deliberately go into default to adjust capital allocation.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisCan a LP transfer its interest in the fund? Speaking Capital: LPs

Typically, the transfer of fund interest (fund secondary) is subject to approval by the GP and may, additionally be subject to a right of first refusal for the GP or other LPs.

If a right of first refusal applies, the seller obtains offers for its fund interests itself or via a placement agent.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisWhat should be considered if the LP is a fund of funds, endowment or sovereign wealth fund? Speaking Capital: LPs

It is very likely that diversification requirements at the level of investors that are diversified asset managers or subject to investment-related regulation will require a re-balancing of the portfolio after the valuations of public assets such as stocks have fallen dramatically.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisCan an LP withdraw its capital commitment? Speaking Capital: LPs

LPs cannot withdraw their capital commitments after they have been accepted at a closing. However, until subscription documents have been delivered to the GP, there is no legal obligation on the LP's side.

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Dr. Fabian Euhus April 14, 2020 Corona CrisisCan the fund provide collateral for the portfolio companies? Considering Investments: Portfolio Companies

Typically, the fund documentation provides for strict restrictions or even a prohibition for funds to provide collateral for portfolio companies' debts.

Even if this is not the case, the tax status of German funds and funds with German LPs must be taken into account.

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Dr. Fabian Euhus April 14, 2020