An investor needs to ensure a fund vehicle is appropriate for their own particular circumstances. As such, the investor must consider the principle terms to understand the entire structure of the vehicle, including: determining it’s liquidity and the mechanisms in place to enter and exit the fund; the pricing structure; how long the Manager will take to invest capital, when it may be returned; the level of risk in the vehicle and any target or investment parameters or restrictions.
Furthermore, investors should seek to ensure the manager’s capital raising aspirations are compatible with the scalability of the strategy, to ensure standing investors are not disadvantaged as the fund grows. Obviously, fees need to be well understood from the outset too, from launch costs to ongoing costs to the unit/shareholder, whether there is a performance fee and if so, how that fee is calculated to determine if the Manager’s interests are appropriately aligned with investors.
Listed below are a set of questions that should help to draw out information on the Principle Terms:
As mentioned in the introduction, AREF’s Code of Practice is widely acknowledged as the gold standard in corporate governance and transparency – something all investors should be looking for in the funds they invest in. It is a principles-based code, built around the three key elements: Transparency, Operational Integrity and Accountability. While it wouldn’t preclude asking any of the questions we suggest in this paper, investors should look for the AREF Quality Mark displayed on the fund materials they are considering and perhaps ask to see how the fund is performing against these measures, in terms of standard compliance or whether they have attained the level of ‘best practice’.
Investors need to ensure the Manager has a suitable set of policy documents in place and determine what level of fund oversight there is in place, whether it is independent and discuss the composition of any investment committee, assessing its level of expertise and experience. Investors may also wish to understand how they or other investors may be represented for particular decision making or transparency purposes. Investors should seek to ensure transparency for all, regardless of the size of investment made. Different funds also have differing threshold levels for voting, so investors should establish what these are.
Alignment of interest is an important factor to consider, so investors should seek detail on the Manager’s or investment team’s investment in the fund and whether it seems adequate.
Investors should also be clear on how the assets in the fund will be valued and the level of reporting they will receive regarding this and general progress and developments within the fund.
Listed below are a set of questions that should help to draw out information on Governance:
