“The formulas by which GP limited partners are compensated are complex, and the stakes are frequently high,” says Don May (Marks Paneth & Shron) in his recent article “Strategies for Avoiding Valuation Disputes in Connection with Breakups of Hedge Fund General Partnerships” in the Hedge Fund Law Report. And when the GP limited partner wants to leave a hedge fund GP, and the hedge fund holds illiquid or esoteric investments, the challenge becomes even more complex. May outlines two principals to follow in this type of valuation:
- Have agreed-upon guidelines in place prior to the formation of the GP
- Categorize different asset types and investments strategies
“Guidelines for the valuation of investments—a fundamental input into the valuation of the general partnership—must be linked to the assets in which the fund invests and the fund’s investment strategy. Such guidelines are necessary for any breakup agreement,” says May.
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