Contributed by Seward & Kissel LLP
When presented with an opportunity to join an investment management platform, a prospective manager should carefully take into account the following considerations:
– Duration of Investment Allocation; Permitted Adjustments. The key value of a platform deal for the manager is being granted the right to manage a discrete pool of assets in an account (usually, a fund) through which the manager will build its track record and generate income and profit sharing. While the headline dollar amount is, of course, a critical factor in negotiating the deal, so too are matters like (i) the duration of the guaranteed allocation (often subject to a phase- in period), (ii) the platform sponsor’s rights to reduce (or increase) the allocation, (iii) the platform sponsor’s rights to terminate the allocation (and the platform relationship) depending upon certain circumstances, and (iv) the platform sponsor’s rights to override a trade. Importantly, if the platform sponsor’s termination or allocation reduction rights are very broad or overly discretionary, the manager may find that the “guaranteed” allocation is illusory and its rationale for joining the platform is ultimately unfulfilled.
– Turnkey Set-Up. Another significant selling point of a platform deal is that the manager typically will not have to focus on an infrastructure build-out, as the platform sponsor will often provide office space, some level of personnel, and various other types of middle and back office support (such as compliance, accounting and maybe even trading). Of course, this solution comes at a price, as often these deals have a charge-back of certain expenses to the manager or the platform may deduct such expenses from the manager’s compensation. Accordingly, understanding what infrastructure is being provided, who truly pays for it and who approves any budget is vital in these deals. See also, “Expense Segregation” below.
– Track Record Ownership. As indicated above, managers joining platforms have the ability to build a track record. Accordingly, it is imperative that any documentation relating to the track record indicate that the manager owns it, that the manager was responsible for the generation of the track record, and that the track record and all supporting data is freely portable, if the manager ever leaves the platform.
– Compliance Concerns. When joining a large established platform, the manager will also need to be mindful of compliance issues. First, the manager will likely be subject to all of the compliance policies and procedures that have been adopted by the platform sponsor, and this can be onerous, especially if the sponsor is a complex organization or a highly regulated entity (such as a bank). In addition, if there are other managers on the platform, it is imperative that the manager understand whether trades in its account will be aggregated with other managers’ trades for regulatory purposes (e.g., Sections 13 and 16 of the Securities Exchange Act).
– Performance Segregation. Although conceptually a platform deal is the management of a discrete account of a larger investment vehicle, the overall performance of the larger investment vehicle can have a significant effect on the performance of the account. Therefore, it is crucial that the manager use great care in understanding to what extent the performance of its account can be impacted by any negative performance of fellow account managers on the same platform. Of paramount concern, if the account run by the manager has its counterparty relationships in the name of the overall platform, and there are other accounts operated by other managers, there exists a risk that a “blow-up” of another account could result in all of the other accounts having cross-account liability to the counterparties.
– Expense Segregation. A related segregation issue is the need to ensure that costs from other accounts on the platform are not allocated to the manager’s account. These costs can include trading costs, hedging costs (often the platform sponsor will have the right to place hedges to achieve beta neutrality or otherwise mitigate excess risk in a strategy), fees paid to other account managers, service provider costs and/or costs of litigation and indemnification.
– Profit Sharing Limitations; High Water Mark. The manager should also pay careful attention to any limitations on when profits may be shared, such as if the broader platform investment vehicle is “netting” the performance of all managers on the platform (i.e., a manager will only be paid incentive amounts, if the entire platform investment vehicle is above its high water mark, regardless of whether certain managers may, in fact, be profitable within their accounts). In such circumstances, a manager who has strong performance may have its profit sharing deferred until the broader investment vehicle exceeds the high water mark. If a manager is joining a platform with these types of limitations, it needs to understand whether the investment vehicle is above or below the high water mark before signing on, and whether there are any work-arounds to consider.
– Non-Compete; No-Poach. A manager is almost always required to agree to non-compete restrictions as part of joining the platform; these are often crafted so as to cause the manager to be effectively unemployable during the non-compete period. Accordingly, a manager should take great care in negotiating the non-compete duration (and scope) in conjunction with the negotiation of the sponsor’s rights to terminate the manager or reduce the assets allocated to the manager’s account, as the level of commitment of the platform should always bear symmetry to the commitment of the manager. In addition, it is not uncommon for there to be restrictive covenants limiting the ability of an exiting manager to take clients or employees – these too ideally should have short durations, as well as carve-outs for personnel and clients brought on by the manager as opposed to the platform sponsor.
– Rights to Launch a Separate Fund. Often managers join a platform as an intermediate step before launching a stand-alone fund management business. Indeed, joining a platform provides a unique opportunity to refine an investment strategy and develop a track record without the distractions of managing the day-to-day operations of a fund management business. However, the manager should closely analyze what restrictions the platform sponsor may have over when (and if) a manager may leave the platform to launch a separate fund management business. Beyond the track record and client points discussed above, other considerations include the manager’s ability to use its corporate name (and the platform sponsor’s name) when leaving and whether it can spin out any fund and management vehicles that may have been created specifically for the manager on the platform.
– Sponsor Rights to Revenue Sharing for Future Activities. While many platform sponsors will give a manager the right to ultimately launch a separate fund management business, it is common that the sponsor will require certain rights in respect of any investment vehicles managed by the manager, including capacity rights with special fee terms, and, most significantly, a share of the revenues of the future business. As these terms – in particular the revenue share – can place a significant burden on the new business, the manager should be sure to fully understand the scope and duration of the platform sponsor’s rights in respect of the manager’s future activities, as well as the amount of the revenue share, any available buyout rights, and to what products does the revenue share apply.
If you have any questions, please contact your primary attorney at Seward & Kissel LLP.
© 2015-present – Seward & Kissel LLP. All rights reserved. This may be attorney advertising. Prior results do not guarantee a similar outcome. These are just some of the considerations involved in a platform deal.