Fund Legal Documents
Fund Legal Documents
An fund advisor is needed when the governing body of a fund, typically the General Partner, does not itself have the competence or the time and organisation to find and execute transactions. Still, the GP wish to have control and instead of signing a management agreement with more extensive powers, it signs an advisory agreement which states that the advisor shall produce investment advice in accordance with certain standards and restrictions and present them to the GP for its consideration.
Most offshore funds are formed with GPs which consider investment advice and make their decisions upon seeing these. The GP is not active in the market trying to find and structure transactions but are experts at considering the content and compliance of investment advice presented by a competent advisor.
The Instrument of Adherence is set up in the form of an application made by the investor that wish to be accepted as a Limited Partner in the fund. It is part of the KYC procedure of the General Partner which is obliged to consider both whether or not the investor can be accepted as an investor in the fund but also whether or not to invest in the fund is suitable for the particular investor.
The Instrument or Deed of Adherence of a fund is signed by the Limited Partners and states the details of their commitment, their bank account to be used for distributions, communication lines for reporting and so forth. The Limited Partner also states for the record what type of investor it is, a pension fund, bank, “family company”, trust and so forth.
US and Canadian investors are typically obliged to submit particular information required for later reporting. As particularly tax reporting for investors with cross border investments is becoming more complicated, the Instrument of Adherence will also develop.
A Legal Opinion is a form of legal statement produced by a legal firm or body, expected to have particular competence about the issue in question. Legal opinions are legal statements of the considered and contemplated variety – they are not quick and easy and normally expensive.
Legal opinions may also be quite standard in form. With regards to establishing funds and applying for licenses to manage, regulatory agencies in a number of jurisdictions may instead of going through all the documentation themselves, choose to rely on a Legal Opinion from a reputable law firm which in quite standard language states that all required documents have been produced and are in line with law and regulations. This reduces processing time to a minimum.
A Limited Partnership Agreement is an agreement between all Limited Partners and the General Partner of a fund. It defines the authority of the General Partner and the rights and obligations of all Partners. The LPA states the terms under which the General Partner shall manage the Partnership, herunder investment restrictions, management fee (General Partner Share), other financial terms (Hurdle rate, Carried Interest, Clawback, Catch-up etc.) and also the names of the people the General Partner shall secure will be working for the benefit of the fund, the Keymen.
The LPA is the most important document when it comes to establishing a fund.
(see Confidential Information)
The Private Placement Memorandum is a marketing document explaining the details of an investment opportunity to potential investors. Private equity funds issue a comprehensive PPM as part of the documentation required by investors.
The PPM includes management biographies, market presentations, manager track record, financial statements, detailed description of the business or the fund, legal terms, tax consequences, a presentation of common risk factors etc. It is a substantial document which must be clearly aligned with the LPA.
In many jurisdictions, the PPM and the LPA will be subject to a legal review in order for a Legal Opinion to be developed before registration or licencing of the fund.
A Side Letter or side agreement is a part of a collective agreement under which one or more participants require special treatment. A typical case would be that one of many limited partners in an LPA, wish to state more clearly the terms under which it shall have the right to be excused from participating in an investment (see Excused Investor).
In principle, the Side Letter carries equal weight to the main agreement. In such cases where the side letter is not known to all the participants of an agreement and/or when it renders part of the main contract without sense, Side Letters may from time to time be disregarded or at least ranked behind the main agreement.