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News October 3, 2005 Issue

A Bit More on Side Pockets

A follow-up note to the September 19 IM Insight article on side pockets:

David Moody, a partner at Purrington Moody (a law firm specializing in hedge funds and private equity), noted that the article cited limited partner withdrawals as a potential problem for funds that limit side pocket investments (for example, 10 percent or 20 percent). He pointed out that thatís a problem only if the percentage applies on an ongoing basis. "In my experience, a side pocketís limitation is measured only as of the time the investment is side-pocketed, which eliminates the technical problem," he said.

Makes sense.

So, to eliminate the potential for limited partner withdrawals causing your fund to hit its side pocket limit, draft the limitation to apply only at the time an investment initially is placed in the side pocket. And, consider disclosing that subsequent limited partner withdrawals may cause the fund to exceed the stated limitation on the side-pocketed investments.