Customization of Fund Structures
As the demands from investors grow in the current economy, Christopher Riccardi, Partner at Seward & Kissel LLP, states that he has been seeing customization of fund structures as a recent trend. Investment managers are designing complicated agreements in response to the investor demands towards a separately managed accounts (“SMAs”) model that has become very popular in recent years. Investors are demanding more from investment managers with respect to transparency, underlying liquidity, investment strategy, processes, internal controls and compliance. Christopher has also seen an uptick of special purpose fund vehicles (“SPVs”), which is a fund product with a limited investment mandate. These SPVs are usually spearheaded by the lead investor to help customize the agreement and dictate the investment mandate, and often structured with favorable fee arrangements.
Customization of fund offering documents usually leads to overly complex documents that cause more issues to investment managers as they are increasingly trying to accommodate special fee structures, liquidity provisions and reporting requirements. These departures from the traditional terms may contradict the fund’s investment strategy, such as investing in less liquid securities but offering investors greater liquidity rights. Christopher suggests that investment managers should maintain their fundamental philosophies and not overcomplicate their agreements.