Fund Management in Times of Crisis: Considerations for Venture Capital Fund Sponsors | Wilson Sonsini Goodrich & Rosati


A venture capital fund manager faces all the issues resulting from the current coronavirus (COVID-19) pandemic that virtually every other business faces: social distancing, business as usual in a virtual environment, shutdown requirements local and state governments, safeguarding the health of employees and others, etc. Venture capital fund managers also face a unique set of issues and considerations, some of which are highlighted below.

1. Potential defaults on capital commitments.

  • Fund managers should consider their available remedies and ability to resolve investor call failures on a case-by-case basis (“Limited partners” Where “LP“), including the manager’s ability to delay the deployment of aggressive default action until there is greater certainty as to the duration and extent of any default situation due to liquidity concerns of LP.
  • Fund managers should consider consulting with their LPs about upcoming capital needs and LP liquidity issues, and getting a realistic idea of ​​when and how much capital is expected.
  • Fund managers should review the availability of lines of credit that support capital calls to alleviate short-term liquidity problems of LPs, and determine whether and to what extent to draw on them.

2. Relationships with Existing and Potential Portfolio Companies.

  • Fund managers should consider discussing with their existing portfolio companies how they can reduce cash burn rates, what additional capital they may need in the coming months, whether and to what extent the fund will be able to assist with this funding, and what other options (including loans and other CARE Act provisions) may be available to support these holding companies.
  • Fund managers must also consider whether and to what extent to invest in new portfolio companies during this downturn. In some cases, the fund’s governing documents limit a fund’s ability to invest in follow-on investments, while in many cases a fund manager may have more leeway in deciding whether to focus on existing investments or news from the holding company.
  • If necessary, fund managers should consider seeking sponsor consent to provide additional flexibility to make follow-on investments. To be clear, some fund managers may think it’s best to focus on supporting existing portfolio companies; some managers may believe that the current economic downturn presents attractive investment opportunities and valuations for new investments in portfolio companies; and other fund managers may opt for a combination of support for existing portfolio companies and new investments in portfolio companies.

3. Ratings.

  • If a fund manager needs to perform valuations of portfolio companies for any purpose, such as for limited partner reporting, management, fee calculations, in-kind distributions or for other reasons, those managers should carefully consider whether traditional valuation methods continue to be appropriate. For example, if a fund manager typically values ​​a portfolio company’s securities based on the value of the portfolio company as reflected in that company’s most recent financing round, the fund manager should determine whether a discount to that valuation is appropriate and what methodology it will develop to determine that discount. The fund’s governing documents may limit the fund manager’s flexibility in developing an alternative methodology for valuation determinations.

4. Working Capital Fund.

  • Fund managers should consider withdrawing capital to finance an increase in fund reserves, if permitted by the fund’s governing documents.
  • If the fund has a line of credit or other borrowing facility to make investments, the fund manager should consider its options under that facility, but also weigh the risks of borrowing during which could be an economic downturn of unknown severity and duration. . Fund managers may also consider obtaining a line of credit, if possible.

5. Extension of key fund periods for fundraising, capital deployment and fund life.

  • The current coronavirus crisis may cause significant disruptions to a fund manager’s ability to raise additional capital, the fund manager’s ability to deploy notionally committed capital, and liquidity options for portfolio companies. Therefore, fund managers may consider seeking the consent of the LP to extend the time periods during which the fund engages in these activities. These extensions may be particularly useful and warranted if fund limited partnerships seek to limit the amount of capital drawn down and/or money invested in portfolio companies for the duration of the current economic downturn.

6. Fund manager concerns.

  • Key person triggers. Fund managers should review key person triggers and consider the implications if key people or team members become ill or need time off to care for sick family members.
  • Time spent managing funds. Many fund agreements require a fund manager to devote all, substantially all, or other specified periods of time to fund management matters. Determine if the fund management team is still able to comply with these obligations and, if not, determine if LP discussions or consent are appropriate and/or required.
  • Recovery Considerations. Fund managers who have already received carry allowances should consider whether there is a risk that some or all of that carry will be subject to future clawback obligations. If so, the fund manager may consider taking proactive steps to reduce the risk of clawback liability, such as segregating some or all of this carry allocation until the likelihood and potential amount of recovery are clearer.

7. Communications.

  • In the current economic climate, we believe that most fund managers would benefit from greater communication with fund sponsors, with its current and potential portfolio companies, with its auditors and accountants, and with other service providers. . There can be bad news and surprises; Limited partners, portfolio companies and the like will generally appreciate it in the long run to hear about it as soon as possible.
  • If a fund is still in a fundraising period, consider the need to update all fund offering documents, marketing materials, and financial projections to reflect the current economic downturn.
  • Consider the need to update a Form ADV and other regulatory filing to disclose any material new risks associated with the coronavirus and the current economic downturn, and to discuss any resulting changes to the fund’s structure and operations.
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