Canada: Hot Topics In Private Fund Negotiations

Our private equity team looks at five of the most important issues facing negotiations—for investors and sponsors alike.


The recent increase in regulatory scrutiny of the private funds industry has turned investors' attention to their negotiations with sponsors. The wide range of issues at hand here centres around investors ensuring they are treated as long-term partners: they want access to investment opportunities, insight into sponsors' strategies and business plans, and transparency and disclosure that reflects the long-term nature of their relationships with sponsors. The following five issues are key for both investors and sponsors to keep top of mind when negotiating the terms of private funds.

1. Equitable Allocation of Investment Opportunities

When a private fund sponsor's business includes multiple pooled fund platforms, or separately managed accounts tailored to specific investors, allocation of investments across these vehicles becomes a key consideration. In these cases, a sponsor's various investment vehicles will often share at least partially overlapping investment objectives, making a sponsor allocating 100% of all on-strategy investment opportunities to any vehicle during its investment period an unfeasible approach.

Investors are aware of this reality and, while typically supportive of sponsors expanding their businesses, they want to ensure that each sponsor has a robust and transparent allocation policy that both sets out the considerations it weighs when making allocation decisions and that provides for a fair and equitable approach to these decisions. From the sponsor's perspective, flexibility is vital to equitably allocate investments in a manner consistent with both its fiduciary duties owed to investors and the terms of the sponsored vehicles.

Communication is key: sponsors can provide comfort to investors by explaining any practical impediments and stressing that all allocation and investment decisions are made in the context of their fiduciary duties.

In addition to ensuring that a private fund's governing documents do not allow a successor fund to be formed until the end of the fund's investment period, investors might also request additional comfort from sponsors, including in the form of consent, notice and/or consultation rights for investors on the formation of new funds and/or separate accounts as well as on-strategy investments being allocated entirely away from the relevant sponsored vehicle. Investors may also wish to see positive obligations for the sponsor regarding the required terms of any shared investments (i.e., transactions where two or more sponsored vehicles invest in the same portfolio investment), such as a requirement for all sponsored vehicles participating in shared investments to invest and divest at the same time and on the same terms. In situations where these requirements are not practical for a sponsor, they can provide comfort to investors by explaining their practical impediments and emphasizing that all allocation and investment decisions are made in the context of their fiduciary duties.

2. Consistent Control Dynamics at Sponsors

Investors treat their investments in private funds as long-term relationships, and conduct considerable business, legal and operational due diligence regarding private fund sponsors prior to investing with them. When an initial investment partnership is successful, existing investors are often at the front of the line to re-up their commitments when a sponsor raises a successor fund. Returns are not everything, however, and investors are interested in their long-term relationship being as healthy and sustainable as possible—that means making sure the sponsor's key individuals are fully involved and properly incentivized for the long term, and that sponsors have thoughtful succession plans to ensure the smooth transition of management at their firms.

Investors often require sponsors to commit to relationships for the long term by pushing for protections on consistent ownership and control of sponsors and their subsidiary entities. Once seen as private information, it is now becoming common for investors to request a breakdown of the ownership of the voting and economic interests (including carried interest) among sponsors' principals before making a final investment decision. Investors are also requesting restrictions on the transfer of these interests to third parties to protect against sponsors or individual principals monetizing their interests, leaving investors with their capital being managed by a different team than their initial partners. Sponsors are aware of how important these issues are to investors and have generally begun to accept that certain limitations in this regard are becoming market practice.

Many premier private fund sponsors are nearing or have surpassed their 30th anniversaries, and many of their funds often have 10-plus year terms. It makes sense, then, that succession planning has become more relevant to both new and returning investors, who are having discussions with sponsors during fundraising to better understand their long-term plans. While approaches to succession planning vary and depend on the circumstances of each sponsor, investors want to ensure their sponsors are thinking ahead and that they have a plan in place that considers the full spectrum of the talent pipeline, including more junior talent. While there is no "one size fits all" succession plan, developing one that is the right fit for the firm—and being prepared to discuss it with current and potential investors—is important to investors and reinforces a shared value for a true long-term partnership between both parties.

3. Fees, Expenses and Transparency

How private fund sponsors allocate fees and expenses has become a hot button issue for investors given the increased regulatory focus on such practices. Traditionally, a fund will incur all managing and operating expenses, including management fees, costs associated with acquisitions and dispositions, audit, legal and tax related fees and fees incurred in connection with investor communications. The sponsor will incur all expenses associated with its overhead (including rent, utilities and employee salaries). However, given the propensity for gray areas (e.g., travel, software, etc.), it is important that a fund's marketing materials, constitutional documents and allocation policies outline how expenses will be allocated.

Investors are looking for sponsors that have robust succession planning to make sure that management at the firm is smooth even in transition.

In recent years, the U.S. Securities and Exchange Commission has pursued two primary categories of actions against private fund advisers relating to expense allocation: (a) a lack of, or inadequate, disclosure of fee and expense allocation (e.g., the acceleration of monitoring fee payments from portfolio investments); and (b) the misallocation or improper shifting of expenses (e.g., disproportionate allocation of expenses among portfolio companies or the allocation of "broken deal" expenses to certain investment entities, but not those entities majority-owned by sponsor affiliates). In each of these enforcement actions, the issue at hand has been inadequate disclosures to investors.

In response to this heightened scrutiny, sponsors are taking efforts to provide accurate and robust disclosure—and as sponsors continue to enhance their disclosures and alter their fees and expenses practices, investors will ultimately look to ensure allocations are reasonable, fair and equitable. The list of fees and expenses that offset a sponsor's management fee is significant to investors, who want to understand how fees will be allocated among the sponsors various investment vehicles and any carve-outs. To promote transparency and alignment of interests between investors and sponsors, the Institutional Limited Partners Association has published a fee and expense reporting template to serve as a resource for both sponsors and investors.

4. Enhanced Co-Investment Rights

As private equity evolves as an asset class, investors are looking to maximize returns and diversify their portfolios with alternatives to the pooled vehicle investment model. As a result, many investors look to obtain co-investment rights alongside the fund investments in their portfolio. A co-investment right gives the investor the opportunity to make a direct investment on a no (or low) fee and carry basis. For their part, sponsors see the benefits in offering co-investment rights: they build stronger relationships with important investors, gain access to larger pools of capital and improve the chances of successful fundraising and investing.

In negotiating a co-investment, investors will consider, among other things, the structure of the co-investment and seek to ensure that the co-investment has no, or minimal fees and protects against affiliate transactions, that they are aligned with the sponsor with respect to liquidity events, and that any reporting issues have been addressed. Depending on the size of the co-investment, investors may demand additional rights such as board representation, observer rights and veto rights.

Sponsors generally structure co-investments on a deal-by-deal basis, with an investor's interest in co-investment opportunities recognized in the investor's side letter and leaving negotiation of the terms of any future co-investment for a later date. In some limited cases, a sponsor and investor may negotiate the percentage of a co-investment that will be offered and the details of a co-investment simultaneously with the investor's entry into the fund.

5. Amendments

A private fund's constitutional document (usually a limited partnership agreement) will generally be able to be amended unilaterally or with the consent of a set percentage-in-interest of the investors (typically ranging from a majority to 66 2/3%). The amendment provisions may also include a "negative consent" whereby an investor's consent to an amendment will be assumed if they have not responded to consent request within a stated number of days, allowing a sponsor to carry out necessary amendments if an investor fails to respond to a consent request. A compromise position for both sponsors and investors often involves sponsors committing to making at least two attempts to obtain consent (a common modification to this middle-ground agreement characterizes an investor's failure to respond to a request for consent as abstention rather than outright consent).

Transparency is a hot-button issue for investors, and sponsors are taking note, enhancing many aspects of their disclosure to meet rising expectations in this area.

Investors are also setting their sights on sponsors' unilateral amendment rights, specifically the right of sponsors to amend the agreement to address changes to the tax treatment of a sponsor's carried interest payments by requiring that sponsors pay the related expenses. While investors generally understand a sponsor's need to amend the fund's constitutional agreement over the life of the fund, they want transparency and communication in the process, and want certainty that they will not have to shoulder expenses for amendments that do not benefit them.


Ultimately, careful planning and thoughtful communication are central to ensuring that negotiations meet the goals and expectations of both sponsors and investors. The private funds market is dynamic, with investment strategy and the investor-sponsor relationship changing in concert. We expect negotiations—including the considerations we've outlined here—to continue evolving in step with the broader private funds space in 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions