Spangler, Timothy
(2012)
Overcoming the governance challenge in private investment funds through the enrolment of private monitoring solutions.
PhD thesis, London School of Economics and Political Science.
Abstract
At the heart of any investment fund (whether public or private) is an investor
protection concern that arises from the collectivized nature of the fund. In a
bilateral arrangement, a client may negotiate ‘bespoke’ terms with a prospective
investment manager. By contrast, an investment fund provides ‘off the shelf’
terms to prospective participants, many of whom may have relatively small
percentage positions in the ultimate fund, although the sums of money they
provide may often be very significant to them.
The governance challenge at the heart of all collectivized investment structures is
most clearly seen in connection with private investment funds. Largely, the
structure of such funds has been driven by the need to comply and obtain
necessary exemptions under the financial regulatory rules, while simultaneously
addressing a series of interrelated tax issues arising from various pieces of antiavoidance legislation adopted over the years.
Three private monitoring solutions are identified which would enable fund
investors to address more directly the problems arising from the governance
challenge by facilitating a better flow of information from the fund manager to the
investors:
(1) side letters, which provide a particular investor with further information
and/or control rights with regard to the operation of the fund;
(2) improving the operation of the board of directors in either corporate-based
funds or the general partner vehicle of limited partnership structures by
the inclusion of independent directors; and
(3) listings of private investment funds on securities exchanges as a means
of adopting ongoing compliance oversight.
Each approach recognizes the commercial contexts in which private investment
funds operate by emphasizing voluntary steps that fund managers and investors
can take incrementally. Further, each focuses on the provision of information as
the means to overcome the investment protection concerns that arise due to the
collectivized nature of the private investment fund.
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