There can be various complex and unexpected cases that can occur during the life of the fund. We will cover a few examples and understand how to handle such situations or how such situations are handled in a fund.
Suppose an LP comes up and asks for split in its capital commitment. This means that he would like to share his commitment with some other LP in a defined ratio. In that case all the previous contributions (draw downs), expenses, investments, undistributed incomes of the original will be re-allocated among the new ratios between these LP's. How to handle distributed income remains in the hands of people involved in the split because that amount is already in the hands of original LP.
Let us understand with numbers, the case of split.
The last figures as per continuing example from my previous posts that we had are as follows:
Now suppose LP #6 decides to split his commitment among himself and a new LP, LP #7. (Note that split can happen between existing as well as new LP's.) He decides to keep a capital commitment of 30 wheres decides to pass on capital commitment of 20 to the new LP #7.
The new figures will be calculated on a pro rata basis between the 2 LP's. Let us see how their holdings and allocations change:
In practical scenario, a split happens most of the times between husband and wife, to reduce the burden of tax on profits.
There can be cases where an LP defaults or does not intend to pay any drawdown amount from now on. These cases can be handled in a variety of ways. In most cases, the Contribution Agreement of the fund also gives a lot of flexibility in handling such cases. A lot of options are mentioned and one of those can be executed in case of a default.
Options like
Suppose an LP comes up and asks for split in its capital commitment. This means that he would like to share his commitment with some other LP in a defined ratio. In that case all the previous contributions (draw downs), expenses, investments, undistributed incomes of the original will be re-allocated among the new ratios between these LP's. How to handle distributed income remains in the hands of people involved in the split because that amount is already in the hands of original LP.
Let us understand with numbers, the case of split.
The last figures as per continuing example from my previous posts that we had are as follows:
CC
|
CC Ratio
|
Drawdown
|
Investment
|
Mgmt Fees
|
Deal Exp
|
Non Deal Exp
|
Cash Balance
| |
LP 1
|
10
|
7%
|
2
|
1.00
|
0.2
|
0.07
|
0.07
|
0.67
|
LP 2
|
20
|
13%
|
4
|
2.00
|
0.4
|
0.13
|
0.13
|
1.33
|
LP 3
|
30
|
20%
|
6
|
3.00
|
0.6
|
0.20
|
0.20
|
2.00
|
LP 4
|
25
|
17%
|
5
|
2.50
|
0.5
|
0.17
|
0.17
|
1.67
|
LP 5
|
15
|
10%
|
3
|
1.50
|
0.3
|
0.10
|
0.10
|
1.00
|
LP 6
|
50
|
33%
|
10
|
5.00
|
1
|
0.33
|
0.33
|
3.33
|
150
|
30
|
15
|
3
|
1
|
1
|
10
|
Now suppose LP #6 decides to split his commitment among himself and a new LP, LP #7. (Note that split can happen between existing as well as new LP's.) He decides to keep a capital commitment of 30 wheres decides to pass on capital commitment of 20 to the new LP #7.
The new figures will be calculated on a pro rata basis between the 2 LP's. Let us see how their holdings and allocations change:
CC
|
CC Ratio
|
Drawdown
|
Investment
|
Mgmt Fees
|
Deal Exp
|
Indirect Exp
|
Cash Balance
| |
LP 1
|
10
|
7%
|
2
|
1.00
|
0.2
|
0.07
|
0.07
|
0.67
|
LP 2
|
20
|
13%
|
4
|
2.00
|
0.4
|
0.13
|
0.13
|
1.33
|
LP 3
|
30
|
20%
|
6
|
3.00
|
0.6
|
0.20
|
0.20
|
2.00
|
LP 4
|
25
|
17%
|
5
|
2.50
|
0.5
|
0.17
|
0.17
|
1.67
|
LP 5
|
15
|
10%
|
3
|
1.50
|
0.3
|
0.10
|
0.10
|
1.00
|
LP 6
|
30
|
20%
|
6
|
3.00
|
0.6
|
0.20
|
0.20
|
2.00
|
LP 7
|
20
|
13%
|
4
|
2.00
|
0.4
|
0.13
|
0.13
|
1.33
|
150
|
30
|
15
|
3
|
1
|
1
|
10
|
In practical scenario, a split happens most of the times between husband and wife, to reduce the burden of tax on profits.
There can be cases where an LP defaults or does not intend to pay any drawdown amount from now on. These cases can be handled in a variety of ways. In most cases, the Contribution Agreement of the fund also gives a lot of flexibility in handling such cases. A lot of options are mentioned and one of those can be executed in case of a default.
Options like
- capping his capital commitment to that extent where the capital commitment of the whole fund reduces by the amount unpaid by that LP.
- returning only his contributed amount and not the profit portion on that amount while distributing in the end.
- forfeit all his amount.
- return some percentage of the amount contributed by him.
- in some cases, he will be a part of all future expenses (not investments) as well by the cash portion remaining and the profits on his investments will be allocated to other LP's and not to him.
- any other options as per the funds discretion.
