SMArt Due Diligence – April 2022 | Issue No. 171 – Due Diligence on Public Funds in Funds-of-One | Cadwalader, Wickersham & Taft LLP

Fund Finance Friday has previously reported on the continuous rise of public pension money in private equity. Generally, such investments are made in commingled funds with a diversified group of investors, but we also commonly see these public pension and retirement funds (each, a “Public Fund”) invest in a fund-of-one vehicle where all or substantially all of the assets are from the Public Fund (a “Fund”). Such Funds are commonly known in the industry as an “SMA” (separately managed account). For purposes of this article, I will refer to such Funds as SMAs. Fund Finance Friday has also previously covered SMAs and related documentary considerations – for example, the (in)famous investor consent letter (“Investor Consent Letter”) is often critical from a lender’s underwriting perspective.

In this article, I will focus on the recommended scope of due diligence to be conducted when an SMA’s sole investor is a Public Fund to ensure that both the Public Fund has the authority to invest in the SMA (the “Investment”) and to confirm that there is no obvious prohibition of the Investment under state law.

Here at Cadwalader, the recommended scope of due diligence entails a review of the (i) applicable limited partnership agreement (“LPA”), investment management agreement, private placement memorandum, subscription agreement and side letter (collectively, the “Fund Documents”), (ii) applicable state constitution and statutes (the “State Documents”) and (iii) publicly available records (“Public Records,” together with the State Documents, the “State Reference Materials”). Although due diligence of a Public Fund in an SMA often consists only of the Fund Documents, lenders should consider broadening the scope of diligence to include State Reference Materials.

Fund Documents

In all subscription credit facilities, we recommend due diligence on the Fund Documents to ensure the documents are valid, binding and enforceable against the investor(s) and to…

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