3 Ways General Partners Can Prepare for Increased Regulatory Scrutiny

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Contract Intelligence

According to a recent report by Bain & Co, 2021 has proven to be a record-setting year for both global M&A activity and fundraising for alternative strategies. This historic uptick in activity has led to a dramatic increase in the amount of work required for general partners (GPs) to organize, track, and manage the critical promises made to their limited partners (LPs) contained in private funds documentation—especially Limited Partnership Agreements (LPAs) and investor side letters.

Simultaneously, the SEC has become increasingly focused on GPs who exhibit “inadequate policies and procedures or inadequate disclosure” with respect to their LP relationships. In particular, the SEC is focusing on fee and expense provisions, seeking to protect the economic interests of LP and hold GPs accountable to the terms agreed upon in their LPAs and side letters. 

While this regulatory scrutiny has increased dramatically over the past decade, on November 10, 2021, Gary Gensler, the Chairman of the SEC, announced his intention to continue upping scrutiny on side letter provisions—particularly around how private funds allocate fees and expenses across their base of investors. By announcing his intention to adopt new rules that “scrutinize how private funds charge investors and measure performance,” Gensler hopes to mitigate conflicts of interest between GPs and their investors and hold GPs accountable to the terms agreed in their fund documentation. 

3 Ways General Partners Can Prepare for Increased Regulatory Scrutiny

Gensler’s announcement acts as a strong warning to GPs who are responsible for delivering on the many promises contained in their LPAs and side letters. While it is unclear exactly when specific rules will be adopted, the need for GPs to implement a robust system of disclosure, organization, and compliance is clear. GPs must act now to establish a comprehensive system of compliance for their investor promises; failure to do so can lead to regulatory scrutiny and fines, reputational damage, and loss of investor trust. 

Here are three things GPs can start doing today to address the increasing regulatory scrutiny on fee and expense provisions in side letters:

  • Identify bespoke fee and expense provisions across all side letters for all funds. Establish a fast and easy way to reference provision language and understand nuanced differences across investors.
  • Assign accountability for all deliverables relating to fees and expenses. Ensure that everyone across the organization is delivering on promises made to investors within the contractually agreed deadlines. 
  • Maintain a comprehensive audit trail of compliance by documenting the policies and procedures related to fee and expense allocation. Maintain a digital record of compliance that can be easily shared with auditors. 

The SEC’s own language speaks directly to the need for GPs to adopt a comprehensive system to identify all relevant fee and expense provisions, assign accountability for associated deliverables, and maintain a comprehensive audit trail of compliance with such provisions. However, due to the nuanced and complex nature of fund documentation, asset managers have not had a dedicated tool to help them efficiently and effectively manage the work owed to their investors. Until now.

Insight is the first software solution that allows fund managers to organize and actively manage obligations to their investors across all of their funds in one centralized platform. Purpose-built to address the exact needs of GPs and the unique complexities of private funds documentation, Insight’s allows GPs to easily upload fund documentation, abstract obligations, and assign owners to key workflows. Dozens of leading GPs—like Silver Lake, L Catterton, and AllianceBernstein—are already using Insight to save time and money on fund compliance, drive organizational accountability, reduce regulatory risk, and ultimately strengthen relationships with their investors

To keep your firm ahead of the curve on side letter compliance, contact us for your demo of Insight today.