+ CG-S07 —
The manager is expected to act in the investors’ interests and to create structures in the vehicle in such a way that the alignment of interests is enhanced and potential conflicts of interest are dealt with in a transparent way. It is essential not to encourage risk-taking inconsistent with the risk profile of the vehicle. A written protocol how to handle conflicts of interest within the vehicle has to be implemented which outlines how investors will be treated on new issues, redemptions and transfers of equity (or debt investments) in the vehicle and co-investment opportunities. The investors on the one hand should advise the vehicle and non-executive officers in a timely manner if they consider that the vehicle is not being run in their best interests and on the other hand should inform the vehicle about any conflicts of interest originating in their own bodies. In this case investors should make available any necessary information in a timely and proper manner to enable the manager to take appropriate measures.
Co-investment: The co-investment arrangements should run for the life of the vehicle and provide that key personnel and other individuals running the vehicle co-invest a meaningful amount in the vehicle.
Key personnel: A small group of individuals should be designated as key men whose departure would trigger a key man event possibly implying a suspension of the investment period. If a replacement has not been identified within a defined time period the vehicle can be terminated for fault.
Fee and carry structures: Fees should be designed to enhance the alignment of the manager’s interest with that of the investors. Best practice is that the manager receives a management fee that is sufficient to manage the vehicle and a carry structure that rewards the manager for adding value above the expected return in the base case.
Conflicts of interest: A clearly defined protocol to manage conflicts of interest should be in place and overseen by the non-executive officers or investors. The protocol should define the extent to which the manager has to offer investment options exclusively to the vehicle.
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