Episode Description
For many investment managers, triggering a suspension clause can be considered an extreme and unwelcome step. Investor opinion and market sentiment can be negatively impacted should a fund trigger a right to suspend. There can be a multitude of reasons as to why investment managers might seek to suspend. In many cases, unknowable and unforeseen events could impact a funds value or what may have seemed a sound commercial decision has proved otherwise. Whatever the reason, funds can lose value and both investors and investment managers should be alive to suspension and gating provisions at the outset of the funds inception or the making of an investment into a fund.
When considering or faced with a suspension, the starting point is, of course, the companies constitutional documents. A right to suspend must be explicitly included in the funds documents. Suspensions can be effected in a number of ways. First, a fund might seek to suspend the calculation of a funds net asset value. In this scenario, the fund will not seek to calculate any amounts due and owing to an investor that has submitted a redemption request.
The knock-on effect is that the redemption request will not be discharged. It is uncontroversial that such a suspension will not be welcomed by investors whether they have already submitted a redemption request. As a further point, the suspension of the NAV means the fund can no longer accept subscriptions nor calculate management or performance fees until such time as the suspension is lifted.
If permissible under the constitutional documents, a fund could also suspend payments to investors that submitted a redemption request. It is important to note that a suspension is just that and not a refusal to make a payment to an investor that has submitted a valid redemption request. The suspension can be partial in terms of amounts paid out or can be time focussed. How the suspension operates is entirely determined by the funds documents and the language relating to these rights should be clear and unambiguous.
It is also worth noting that while a suspension can be considered radical action, it can also serve to ensure the fund and its assets are best protected in the face of a flurry of redemption requests. It is not uncommon for funds to suspend the NAV calculation or payments and once market conditions improve, the suspension is lifted and the fund can continue to operate.
There is another option available to investment managers, subject to the explicit terms of the constitutional documents, which limits payments to investors that have submitted redemption requests. Gating provisions can operate to limit the amount payable or the timing of the payment. However, the effect of the gating provision is that it can trigger further redemptions rather than discouraging further redemption requests because once the gating provision is triggered, investors are ordinarily paid in priority and investors may not wish to be left behind for fear there might not be enough assets to pay all investors.
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.
