Private market funds may need to wind down for various reasons, and fund managers should have a plan in place to ensure a smooth process. Sometimes, a fund needs to wind down as part of the normal life cycle, such as reaching maturity or a previously agreed-upon date. Other times, it may happen in response to liquidity issues or redemption demands, operating costs, a weak market or other challenges. Whether expected or not, having a plan already in place helps fund managers protect investors and preserve capital to the greatest extent possible.
Fund managers in private markets tend to focus on making investment decisions, generating returns for investors and growing their funds. They probably don’t think much about the day when winding down the fund becomes the best course of action. However, it’s important for any manager to be prepared for that eventuality.
When it comes to winding down a fund, there is no definitive good or bad outcome. Ultimately, fund managers make the difficult decision in the best interest of both general and limited partners. On a positive note, this can present an opportunity to refocus efforts, streamline operations and pave the way for a fresh start with a new strategy.
Whether for urgent reasons or part of the long-term plan, it’s worth noting that an orderly wind-down can take a year to 18 months to implement, during which a wide range of issues need to be addressed. That is why all funds, even those in a healthy position, should understand what a wind-down entails well before they need to, and line up professional resources they can call upon for support if and when the decision is made. Protecting investors and preserving their capital to the greatest extent possible are the ultimate goals.
A smooth transition plan starts with understanding the steps involved and the risks that need to be managed. The specific requirements and processes for winding down a fund vary drastically. To ensure a smooth exit, fund managers should understand the steps and risks involved. Working with an experienced fund administrator with knowledge of different jurisdictions, fund types and structures is highly recommended. They can assist with investor communications, financial record-keeping and reporting, timely regulatory filings, distribution calculations, disbursement of proceeds, dissolution documentation and other operational matters.
Before onboarding a fund administrator, ask about their wind-down experience and capabilities in the due diligence reviews. Have they been through the process before? Do they know the proper steps? Are they familiar with the local regulatory framework in different jurisdictions? With the right amount of forethought, planning and support, the winding down of a fund doesn’t have to be a sad end, but rather the beginning of a new chapter.
To learn more about how to create a wind-down strategy that will leave you ready to start a new chapter with new opportunities, download our "On to the Next Chapter: What You Need to Know When It's Time to Wind Down a Fund" whitepaper.
