Due Diligence Corner - July 2013 Publication


Orical LLP has reviewed hundreds of offering documents of hedge funds and private equity funds across the jurisdictional and strategy spectrum in an effort to provide due diligence counsel to our clients. As a result, we believe we are uniquely qualified to provide analysis regarding the prevailing offering terms of private funds as well as on any trends or developments in the industry. In our Client Updates, we hope to provide you with an example of a development within the private fund industry that we have observed from our recent due diligence efforts.


In this Update, we will focus on the importance of determining which party has been entrusted with the valuation authority over a hedge fund’s portfolio by a Fund’s constitutional documents. Private fund offering documents frequently state that either a Fund’s Board of Directors, Investment Manager, or Administrator (or some combination of the foregoing) will be responsible for the valuation of its portfolio. Certain conflicts of interest may arise depending on which party has been delegated this authority, especially when the Investment Manager or a Board of Directors which is not truly independent has been granted this right. For example, a conflict of interest may exist when an Investment Manager, who is already receiving a performance or incentive fee from the Fund, values the portfolio. It may be in the Investment Manager’s best interests, although not those of the Fund, to value certain illiquid securities included in the portfolio at a higher value than a non-conflicted valuation agent so that the incentive fee payable to the Investment Manager is materially affected. As a result, we generally prefer that our clients invest in Funds which delegate final valuation authority over a hedge fund’s portfolio to an independent administrator, NAV Calculation Agent or Board of Directors in order to minimize potential conflicts of interest.


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