🛠️ Investment Fund Key Terms, Part 28

🎉 Happy Friday, funds family!

Today, we have Part 28 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 Warehoused Investments.

What happens if the GP wants to purchase a great investment before the fund holds its initial closing? Warehoused investments are the answer.

➡️ What is a warehoused investment?

A warehoused investment is a deal acquired by the GP (or an affiliate) before the fund's closing, with the expectation that the fund will later purchase it. It's essentially a placeholder structure. The GP "holds" the asset temporarily until the fund is ready.

➡️ Why warehouse deals?

Common reasons include:

• Timing gap between signing and fund close

• Anchor investor delays

• Fast-moving deal environment

• Strategic opportunity the GP doesn't want to miss

In emerging manager funds, warehousing is especially common.

➡️ How does it work?

Typically, the steps are as follows:

1. The GP or affiliate acquires the investment with its own capital.

2. The fund closes.

3. The fund purchases the investment from the warehouse vehicle — often at cost plus expenses (sometimes with interest).

Another method involves forming the fund entity and having the GP affiliate loan money to the fund entity before the initial closing. Then, at the initial closing, the fund calls capital to repay the affiliate loan.

➡️ Where risk creeps in

Warehousing raises conflict issues:

• Was the price fair?

• Did the GP allocate upside appropriately?

• Were terms fully disclosed?

Many LPAs require:

• Cost-only transfers (no markup)

• Disclosure of fees and expenses

• LPAC review or approval if the investment is sold at fair market value (higher than cost)

➡️ Regulatory and tax issues

Warehoused investments typically are not eligible for QSBS treatment upon their transfer to the fund.

In addition, unless the warehoused investment is purchased (and transferred by) the fund's management company (or a wholly-owned subsidiary thereof), it's possible the transferred investment would not be a "qualifying investment" for the purposes of the "venture capital exemption" under the Investment Advisers Act.

Work with your lawyer!

⏩ Next up in Part 29: Co-Investments

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.