The (GP) replacements

Managers, investors and stakeholders have been forced to come up with creative solutions to issues that have arisen in an industry that has remained out of the regulatory limelight during previous financial turmoil.  

As a result of the demand for accountability, some managers and investors are using legal processes in offshore jurisdictions to assert pressure to release value or to release themselves from stale agreements. For example, the well-developed insolvency regimes in the Cayman or British Virgin Islands courts can be particularly effective in breaking an impasse in trying to gain information or locked up value. These processes can ensure that an independent party is then responsible for overseeing the funds and working out all outstanding issues.  

Joel Cohen

General partners and limited partners alike will maintain that effective communication is crucial to “keeping the peace” amongst all stakeholders. Many managers or GPs feel strongly that talking through issues openly and honestly, both with individual LPs and with groups of LPs, can provide the quickest route to a mutually beneficial resolution. However, there will inevitably be times when there exists a divergence between a manager and the investors, resulting in an orderly exit being the best available solution for all parties. We have seen this occur more and more frequently in the last three to four years. 

In response to this increase and in particular to provide a palatable alternative to insolvency proceedings, which what many managers view with fear, or the stigma of ‘liquidation,’ third party service providers are creating dedicated registered investment advisors for the sole purpose of being available to clients who find themselves in this predicament. A separate entity can step in as the fund manager or GP, often hiring the original manager back as a consultant given his/her deep knowledge of the strategy and investments. This has proven to be a valued course of action for all parties.  

This unique solution may be perfect for any of the following situations: (i) a fund is sitting on assets that have a changed forecast of return and will most likely be locked up longer than the initial terms as set forth in the fund documents; (ii) dissatisfied investors who would like to see the manager removed and value returned, while the manager him/herself is agreeable to stepping down; or (iii) the manager’s interests lie elsewhere and he would prefer to be focused on new strategy rather than baby-sitting historic investments that are under water.    

With the notion of independent registered investment advisers providing services that allow them to step in and alleviate the concerns of all stakeholders, GPs and LPs alike, it is clear that market changes are necessitating new solutions to novel recent problems.  

Joel Cohen is a director at advisory firm Kinetic Partners where he specializes in forensic and dispute services.