Governance amidst disruption - a run on the fund?

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“These days everyone has the same data regarding the present and the same ignorance regarding the future.”

Another particularly apt quote from Oaktree Capital’s Howard Marks, several weeks into lockdown and no closer to knowing where and how we, our families and our nations’ economies will find ourselves in a week, a month or a year.

In our​ last post we discussed some preliminary steps and considerations to be kept in mind by fund managers, operators and investors alike when facing times of economic uncertainty in their business and how simple steps such as regular and transparent communication may be the key to keeping the lights on. The on-going uncertainty serves only to confirm the likelihood there won’t be a “one size fits all” resolution across the board and all stakeholders should be prepared for any eventuality. 

While we must remain optimistic that many investors, particular those who experienced the events caused by the last financial crisis of 2008, won’t act unduly hastily, it is undeniable that times of economic uncertainty typically lead to investors seeking to withdraw their investment for cash, regardless of the apparent stability of the fund. That said, one of the immediate consequences of the period after the last financial crisis was a significant review and improvement of terms found in fund documents with better, clearer and more focused protections and mechanisms in place to deal with uncertain financial times. An apparent run on redemptions or withdrawals can now, typically, be addressed with appropriate measures. We discuss below how managers, operators and investors can prepare for and deal with redemptions or withdrawals, whilst protecting themselves when things don’t go to plan. Offshore open-ended fund vehicles are, in the overwhelming majority of cases, established as companies. Of course, we also see unit trusts and limited partnerships. While this article refers to directors for ease, the principles will equally apply to trustees of unit trusts and general partners of limited partnerships. Download the PDF to read more.