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10.1.25: What Happens When the Fund Must Wind Up?
The typical life cycle of a pooled investment vehicle is 10 to 12 years. When the time comes for the
partnership to liquidate and distribute its assets to its limited partners, it is often the case that illiquid
investments, which can only be sold at discount from perceived value, sit in the portfolio of the PIV. These
securities are often anathema to the large pension funds in their capacity as limited partners in the PIV.
They are nuisances, because they are difficult to value in the pension fund's portfolio and even more
difficult to manage. Accordingly, a number of alternatives have been floated and adopted.
[1]
On occasion,
the investment managers will establish a second partnership or a liquidating trust, tax transparent under
the Internal Revenue Code, and manage the residue investments until they can be intelligently harvested.
Under those circumstances, the managers will generally accept a reduced management fee; the managers'
"promote" or "carried" interest in profits is carried over to what some practitioners have called the Annex
Fund. Alternatively, there are so-called "bottom fishers" in the market, organized to buy entire portfolios at
a discount.
[1]
See generally Testa, Disposing of Venture Fund "Remainders": A Proposed Solution to an Ongoing
Problem, Venture Cap. J. 4 (Sept. 1993).
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