Fees and Expenses Provisions in Investment Fund Agreements

Description

When sponsors and investors negotiate the terms of an investment fund agreement, the treatment of various fees and expenses is often a much-negotiated issue. From fund design through regulatory review and enforcement, the costs borne by an investment fund are a point of intense focus. The treatment in fund LPAs of fees and expenses at the fund's inception is often determinative of the success of a regulatory exam down the road.

Investors demand full disclosure of fees and expenses in the agreement. They will measure compliance with that disclosure throughout the life of the fund, often requiring annual confirmation that the fund has not exceeded the bounds of the LPA in that regard. There is always the threat of regulators examining expense records and comparing them to the disclosures in the fund's offering documents.

In response to investors' desire for greater transparency, and the regulatory push for more upfront disclosure, expense provisions in fund governing documents are getting longer and more detailed. They must address investment evaluation expenses, marketing costs, expenses associated with monitoring investments, broken deal expenses, treatment of co-investors, calculation of transaction and management fees, and reporting obligations and other operating costs, among many others.

The Survey took a deep dive into many expense issues and shed some light on how they are allocated between sponsors and investors.

Listen as our authoritative panel discusses the current thinking on fund fees and expenses, as indicated in the 2020 Survey. The panel will also provide guidance in the drafting of fees and expenses provisions and discuss best practices in disclosure and reporting to minimize the risk of regulatory scrutiny.