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- 🛠️ Investment Fund Key Terms, Part 14
🎉 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.
Here’s 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, let’s jump into the article 😃
➡️ 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 “Fund II” in a particular line of funds, Fund II’s successor fund would be Fund III. Please note that to be sophisticated, you must use Roman numerals.
➡️ Why Limit Successor Funds?
Most closed-end investment fund documents have a restriction on successor funds. LPs don’t 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.
Here’s 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 fund’s “investment period” is typically roughly the first half of the fund’s life. This is the period when the fund makes new investments.
➡️ What Counts as a “Successor Fund”?
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.
➡️ Allocation Policies
In some cases, a fund’s 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.
🗓️ Next up in Part 15: Carried Interest.
Thanks for reading, everyone.
Have a great weekend! 🙌
JURY TRIAL
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