It seems to have fallen upon me to talk about all the things that can go wrong with your fund! As it happens, suspending NAV calculations, subscriptions and redemptions is not the end of the world that it was once considered. If you keep in mind a few key considerations, chances are you will survive this challenge.
Suspensions: The post-2008 context
Prior to September 2008, suspensions were pretty much never invoked. The general view was that to invoke a suspension would cause irreparable reputational damage to a manager. However, in the midst of the 2008 financial crisis, it was those managers that did suspend redemptions, waited for the storm to pass, limited the damage and then eventually lifted suspensions that survived. Those who failed to operate suspensions and gates were left with redeemed (but unpaid) investors whose claims as creditors for their redemption proceeds ranked above the remaining investors. It is because of this that, whilst liquidity is still absolutely key for investors, there is now an expectation that a responsible and well-advised manager would invoke a suspension or gate when reasonably necessary in order to protect the investors' interests.
Navigating a suspension scenario
So, the dreaded situation arises; your fund suffers a financial blow so severe that your investors start to withdraw their funds. What should you do? Firstly, call your lawyer! They will need to carefully review your fund documents to determine what you can and cannot do, and what the correct process is. Getting the right strategy from the start is crucial. Your lawyer should know their way around your fund documents, particularly if they drafted them, and they will know where to look for any potential pitfalls. Secondly, act quickly. You will need to suspend redemptions before the next redemption date. Otherwise, investors that have submitted redemption requests will become creditors of the fund and their redemption proceeds will become payable. So you called your lawyer straight away. What do you need to do next? Below are six key considerations or actions you will want to take.
1. Consult your board
You will need to call a board meeting, as there are various things to discuss. What has your lawyer advised and are you able to suspend redemptions? If not, are there other mechanisms that you can use such as imposing investor or fund level gates or transferring certain assets into side pockets or restructuring the fund in another way? Do you need to work out a liquidation plan or do you think you can ride this storm? Minutes will need to be taken at each meeting, as they may be required in future proceedings to prove that reasonable steps were agreed upon and followed by the board. Make sure to document everything. Whilst not pleasant, the investment manager and the board of directors will need to consider whether there are any conflicts of interest that would, for example, prevent a director who is affiliated with the investment manager from attending and voting at any meetings.
If there is a likely chance of a conflict of interest arising, you will need to consider whether the investment manager and board of directors need to instruct separate legal counsel.
2. Don't forget about redemptions and subscriptions
You need to make sure that as well as suspending the calculation of NAV, you also suspend redemptions and subscriptions. In some circumstances, it may be possible to continue to calculate NAV and you may want to suspend redemptions and subscriptions without suspending the calculation of NAV. If there are investors who have submitted redemption requests and the redemption date has passed, you may also want to suspend the payment of redemption proceeds, if your fund documents permit this. You could also consider payments of redemption proceeds in kind (often referred to as "in specie"), ie by transferring assets worth the same amount as the redemption proceeds to the redeeming investor if your fund documents allow this.
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