Comment: How to avoid the pitfalls of closing a fund

Posted: 07/08/2019

BL63_comment_SharifahMorrisManaging a fund can be emotional – the launch exciting but winding it down frustrating. Here’s how to ease the pain, says Sharifah Morris, Director, Offshore Restructuring

Closing a fund requires planning, experience, resource and cost, especially if the structure involves multiple jurisdictions or holds illiquid assets. The experience may leave investors and fund managers frustrated, especially by the cost.

So how can it be avoided? It’s simple: pre-empt the pitfalls that cause delays, incur costs, increase workloads and make the exit process painful. There are four main pitfalls:

1. Warranty or guarantee beyond closure The company may go through a sale process prior to closure. The sale agreement usually includes guarantees lasting years, so unexpired obligations under the warranty mean the company is not unencumbered from future claims, which will cause delays at closure. 

2. Illiquid investments These securities or assets cannot easily be sold or exchanged for cash without a substantial loss in value.  Generally, these investments are written off, but in some situations they may still generate investment income. The company must be kept active to continue to receive this income.

3. Ambiguous terminology In some cases, the closure process is not clearly set out in the incorporation documents – for example, how unclaimed dividends are to be dealt with and how illiquid investments should be treated. 

4. Lack of skilled resources It is common for businesses to focus resources on new business and launching new funds. As a result, the closure team is often short-staffed and overloaded with problematic issues, which will cause delays and increase the potential for costly mistakes. 

Tips for a good send-off

To wind down a fund, three basic principles apply – planning and communication; documentation; and management decisions. These should be underpinned by experience and background knowledge. Following a number of key steps can help:

1. Planning and communication The more time spent planning, the better the outcome. Be transparent with your closure plans and get investors onside. Develop your plan of closure like any project plan, considering tax and regulatory issues. Agree your project leader, task assignment and costs of service providers. Decide how best to communicate with investors from start to finish – such as via your online investor portal – and how often. And bear in mind the costs of managing expectations.

2. Documentation Ensure fund documents are clear about the end-of-life process, who will be responsible for winding up, which regulations apply and in which jurisdiction. Documents for circulation must be agreed commercially and clearly to avoid confusion in the future. Analyse the fund documents – does the fund have any contractual obligations to underlying investments? Ensure this is understood so that fund managers don’t overpromise on delivery, timing and distribution amount.

3. Management decisions Even if you have liquid assets, many decisions must be considered, documented and communicated when closing a fund. Is your sale price fair? Do you need to appoint a liquidating trustee to transfer illiquid assets? Do you need to cancel the tax registration? Some service providers may lose interest as a fund is closing down as there will be no continuing prospects. Consider staff and post-winding-up service retention to deal with the closure process. Understand the fund manager’s contract and obligations to close down the fund. Plan and agree on information and data preservation and access after closure.  Consider insurance cover for contingent liabilities and unexpired warranties.

Successful closures

The key to a successful fund closure is about anticipating the closure at the earliest stage, with a well-developed plan and transparent and continuous communication. After this, moving ahead will be much easier. 

• Sharifah is running free training courses on fund closures for Businesslife readers. To find out more, email  

The views and opinion expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Offshore Restructuring or the Offshore Group. This article is for general information and is not intended to be and should not be taken as financial advice.

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