Investor protection in funds with project-based return distribution model

By Jiang Fengtao and Yuan Shuyang, Hengdu Law Firm
0
1456

In recent years, private equity investment has witnessed impressive growth in China. The means of distributing private fund returns commonly seen in current private equity fund operational practice are distribution based on the overall returns of the fund and distribution based on the returns on a project-by-project basis (By Project Fund). Generally speaking, more private funds whose investment scale is relatively small, whose risk appetite is relatively high and whose invested projects are relatively numerous will opt for distribution of overall returns, whereas those that have a relatively large investment scale and a smaller number of invested projects will lean towards the distribution of benefits on a project-by-project basis.

江锋涛 JIANG FENGTAO 恒都律师事务所创始合伙人 Founding Partner Hengdu Law Firm
江锋涛
JIANG FENGTAO
恒都律师事务所创始合伙人
Founding Partner
Hengdu Law Firm

As the returns from each project in a By Project Fund product will vary, the fund manager can reap an excessively high performance fee that is incompatible with the overall returns of the fund due to a drop in the returns from or a loss in other projects in the fund, even resulting in the investors losing principal. Accordingly, there is a greater requirement for comprehensive and sound protection of the rights and interests of the investors in such a fund product.

With a view to duly protecting investors’ principal and returns, a By Project Fund contract will usually provide for a mechanism for adjusting the fund manager’s performance fee in the returns distribution clause. The following are the commonly seen clauses:

Retained deposit clause. The retained deposit system is one wherein, in order to prevent the investors incurring a loss due to a loss arising in other projects invested in by the fund after the fund manager has distributed the project returns, the fund manager retains a portion of the performance fee payable to it in the fund as a deposit, and in the event that a loss arises in another project, the deposit is used to cover the loss incurred by the investors.

You must be a subscribersubscribersubscribersubscriber to read this content, please subscribesubscribesubscribesubscribe today.

For group subscribers, please click here to access.
Interested in group subscription? Please contact us.

你需要登录去解锁本文内容。欢迎注册账号。如果想阅读月刊所有文章,欢迎成为我们的订阅会员成为我们的订阅会员

已有集团订阅,可点击此处继续浏览。
如对集团订阅感兴趣,请联络我们

Jiang Fengtao is the founding partner and Yuan Shuyang is a capital market associate at Hengdu Law Firm

Hengdu Law Firm

北京市朝阳区建国门外大街1号

国贸大厦3期B座50层 邮编:100004

50/F, Block B, China World Trade Center Tower 3

No.1 Jian Guo Men Wai Avenue

Chaoyang District, Beijing 100004, China

电话 Tel: +86 10 5985 2999

传真 Fax: +86 10 5760 0599

电子邮箱 E-mail:

hengdulaw@hengdulaw.com

www.hengdulaw.com