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- š ļø Investment Fund Key Terms, Part 14
š Happy Friday, funds family!
Today, we have Part 14 in our many-part series walking through each term in an investment fund term sheet in detail.
Hereās the index of each article in this series (so far):
This week focuses on Successor Funds.
But first..
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Thanks for reading. Now, letās jump into the article š
ā”ļø What is a Successor Fund?
A successor fund is a new investment vehicle raised by the same manager, typically with the same strategy and target investments as the current fund. If the current fund is āFund IIā in a particular line of funds, Fund IIās successor fund would be Fund III. Please note that to be sophisticated, you must use Roman numerals.
ā”ļø Why Limit Successor Funds?
Most closed-end investment fund documents have a restriction on successor funds. LPs donāt want the GP forming a successor fund until the current fund is deployed. Otherwise, the GP might focus on the new fund and forget about the current fund.
Hereās what a successor provision might look like in real life:
"Unless consented to by the LPAC or a majority in interest of Limited Partners, during the Investment Period, neither the General Partner nor its affiliates will consummate an investment on behalf of a new blind-pool equity investment fund controlled or managed by the General Partner or an affiliate thereof and that has substantially identical investment objectives, criteria and scope as the Fund."
Note that a closed-end investment fundās āinvestment periodā is typically roughly the first half of the fundās life. This is the period when the fund makes new investments.
ā”ļø What Counts as a āSuccessor Fundā?
In general, only funds that have the same scope as the current fund count as successor funds. So if the current fund is an early-stage venture fund, only early-stage venture funds would be restricted. Late-stage funds, private equity funds, and funds-of-funds would likely not be subject to the successor fund restriction.
This makes sense, as the purpose of the provision is to prevent diverting investment opportunities to the successor fund.
ā”ļø Allocation Policies
In some cases, a fundās LPA will contain a provision outlining how investment opportunities will be allocated between the current fund and a successor fund (if formed). This offers additional clarity for LPs in the current fund.
šļø Next up in Part 15: Carried Interest.
Thanks for reading, everyone.
Have a great weekend! š
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