The “Tell,” Part 1
Like a poker player, an investor may read the “tells” that an alternative investment manager and private fund provide in the absence of disclosure to protect its interest. Here’s one “tell” to consider:
Bad things can happen when fund principals scale back or cease their involvement with a private fund, such as a hedge fund or private equity fund. Investors protect against this downside risk through the use of “key person” legal provisions.
An area that gets less attention is the comings and goings of back office manager personnel who play important roles in areas like fund finance, accounting, and compliance. While these folks aren’t “key persons,” similar to portfolio managers, they may have exposure to material negative information on a fund or manager related to bad performance or regulatory matters long before investors find out about it.
If bad enough, these negative events may result in back office personnel voluntarily leaving a fund or manager to find better opportunities.
Monitoring the comings and goings of these employees through ongoing legal due diligence and the side letter process may provide a valuable legal and investment “tell” on the overall state of a manager or fund. After all, who has an easier time leaving a fund or manager due to material negative issues without raising attention? A “key person” portfolio manager with a substantial personal stake in a fund? Or a back office employee who is essentially an “at-will” employee with access to sensitive information?