Investors are often asked to invest in unknown funds. When funds are set up and managed by a reputable bank, it can be assumed that the fund is run correctly. When the fund is small and located in an offshore jurisdiction, the investor should do his own due diligence and ask for the relevant documents.

Continental Investments – Real Estate – Dubai by Hesham Moukhtar is licensed under CC-BY-SA 4.0

The goal of a “mini due diligence” is to make sure that the fund is for real and to establish the basic information needed. This is a list of documents and information for a legal due diligence package.

  • Constitutional Documents of the Fund
    • Memorandum of Association
    • Articles of Association
    • Certificate of Incorporation
  • Yearly Documents of the Fund
    • Minutes of shareholders’ meetings
    • Annual reports (balance sheet, profit  + loss sheet)
    • Audit statements
  • Service Providers and their Contracts
    • investment manager / investment management agreement
    • administrator / administration agreements
    • (prime) broker / brokerage agreements
    • Bank / loan agreements
    • Distributors / marketing and distribution agreements
    • Auditor / audit engagement letters
    • Directors and general partners / engagement letters for directors
  • Regulatory Requirements
    • Funds – permit to operate and to be distributed to investors in their jurisdictions
    • Manager – permit to operate
  • Methods and processes
    • Valuation processes used (who has final say?)
    • NAV and fee calculation methods, especially for illiquid and difficult to price assets
    • Processes for reporting to investors – who prepares the reports and who audits / confirms them?
  • Fund Information
    • Number (and identity) of investors, significant holdings, significant subscriptions and redemptions in the last 12 months / since inception.
    • Existence of side letters and other special arrangements for investors
    • Assets under management
    • Operating costs
    • Portfolio, significant trades
    • Fees on subscriptions and redemptions
  • Legal
    • Jurisdiction and applicable law
      • Of fund
      • Of manager
      • For subscription agreement
    • Offshore locations are a special risk!
    • Rights of managers / general partners to unilaterally change the terms / articles of association
    • Suspension of redemption possible under which circumstances? Gates on redemption? Retentions on redemption? Compulsory redemption?
    • Rights of shareholders / limited partners under the specific jurisdiction, e.g. investor-nominated director
    • Subscription agreement
      • Automated proxy to management?
      • Exclusions of liability
      • Guarantees of investor