Multiple funds
A GP will often manage more than one fund in the same market. This can give rise to conflicts of interest and make it difficult for the GP to act in the best interests of all the funds it manages.
What should a GP do when a conflict of interest arises between funds that it manages?
When should the GP establish further funds?
Explanation
Conflicts of interest inevitably arise where a GP manages multiple funds. For example, one fund managed by a GP may seek to acquire an investment being disposed of by another, or an opportunity for follow-on investment in a portfolio company in which more than one fund has invested may arise that cannot be exploited by both funds.
Conflicts can also arise when multiple funds hold investments in a portfolio company and a disposal opportunity arises. It is possible that it may not be in the best interests of all funds to dispose of the investment at that point in time (e.g. where one invested on terms that mean disposal would crystallise a loss to that fund, while another fund would realise a profit).
Recommendation
The GP should establish procedures to promptly identify, disclose and manage conflicts of interest, including cross-fund investment arrangements. These should be set out in the respective fund documents. In most cases, the GP should discuss and seek to resolve all conflicts of interest with the LPs of both funds and/or an advisory committee if one is established before making any decision about the best course of action to take.
There may also be regulatory requirements dealing with conflicts of interest (for example, the AIFMD). Fund managers should be aware of applicable requirements and should comply with them.
Explanation
The GP could prejudice the interests of LPs in an existing fund by establishing a fund with a similar investment strategy too soon after establishing the existing fund. Doing so can compromise the GP’s ability to implement the existing fund’s investment policy and thus dilute the return to LPs in the existing fund. It can also give rise to conflicts of interest if an investment in a portfolio company is split between different funds.
Fees on prior funds generally reduce when the fund is substantially invested or a new fund is raised.
Recommendation
In general, a new fund should not be established until the existing fund is substantially invested/committed. Specific limits on or triggers when a new fund may be marketed or closed should be set out in the fund documents.
A GP should generally seek to avoid making investments in a portfolio company from more than one fund which it manages. In situations where a GP is investing from more than one fund, it should take into consideration the recommendations set out in the section “Managing your relationship with LPs” (LP relations, fourth question).
These Q&As are intended as guidance for member firms and do not form part of the Code of Conduct or the Commentary on the Code of Conduct.
Explore the handbook
Code of Conduct
Code of Conduct Commentary on the Code of Conduct Engage with us
Industry standards
Invest Europe is the guardian of the industry's professional standards, shaping the principles of ethical behaviour and trust that govern the relationships between private equity managers, their investors and portfolio companies.
Industry standards Responsible investment Investor reporting