LiquidationGap® Insurance Policy for Private Investment Funds
Information

Many private investment funds are nearing or have reached the end of their intended investment lifespan. Ambridge’s LiquidationGap® Contingency Insurance can facilitate the accelerated wind-up or liquidation of a private investment fund by providing insurance for either identified or unidentified contingent obligations that the fund managers believe must prudently be provided for by way of reserves or hold backs.

Once a private investment fund has concluded its investment program and sold its investment portfolio, generally all parties have an interest in maximizing the amount of the final distribution and making such distribution as quickly as possible. However, general partners face a decision whether or not they need to maintain cash on hand to cover contingent liabilities – no matter how remote – and what the amount of holdback should be. There is an incentive to distribute as much as possible and thereby maximize investment returns for its members, however this exposes the fund and the general partner to potential liabilities, which if they crystallized would be difficult to recover from the fund members.

In addition, the ongoing operation of the fund to provide for identified or unidentified contingencies will involve the added need to holdback continued administrative and reporting costs that will further reduce amounts available for final distribution to investors. Such reserves or holdbacks are an inefficient use of capital, precluding the private investment fund investors and managers from generating the type of returns that they expect.

Uses by Deal Point

Some examples of where a LiquidationGap® Insurance Policy for Private Investment Funds is responsive include:

  • Existing contingency prevents liquidation
    A private investment fund has completed its investment program and all portfolio investments have been sold. In connection with the sale of one of its portfolio companies, the fund retained the obligation to indemnify the buyer for certain contingent liabilities that the buyer of that company was unwilling to assume. While the probability of the indemnification obligation being called upon is quite low, the fund manager is required to reserve for the full amount of the indemnification obligation until the obligation expires in two years and thus cannot make a final distribution. A LiquidationGap® policy is purchased by the fund to meet the reserve requirement and allow the fund to make a final distribution.
  • Release of an escrow
    The buyer of one of a private investment fund's portfolio companies retained access to an escrow which could be utilized to satisfy certain liabilities that were identified at the time the transaction closed. While the date for the release of the unused portions of the escrow to the fund has passed, the buyer is taking an extremely conservative view of the liabilities and is unwilling to release the escrow fund. The fund manager wishes to terminate the fund and make its final distribution. Attempts to negotiate a compromise settlement have been unsuccessful. The buyer indicates that it requires a full indemnity for the amounts held in escrow before it will release the funds. The fund and buyer negotiate the release of the escrow on the condition that a LiquidationGap® policy is purchased for the benefit of the buyer to respond in the event the contingent liabilities crystallize into loss to the buyer, thereby allowing the fund to wind-up.
  • Contingent liabilities relating to a settlement
    One of a private investment fund's portfolio investments became insolvent eighteen months after it was acquired. In contentious bankruptcy proceedings, the fund and its general partner were named in protracted litigation as the controlling persons of the portfolio company. The litigation was settled and releases were exchanged between most parties. There were parties to the litigation however, that could not be found and did not sign releases. The general partner is unwilling to permit liquidation of the fund due to concerns about future claims against the fund if these parties make a claim against it for the released matters. A LiquidationGap® policy is purchased by the general partner to respond in the event that claims are made against it for the released matters allowing the fund to liquidate.
  • Outstanding indemnification obligation prevents liquidation
    A private investment fund has completed the sale of all of its investments but cannot make a final distribution because of continuing indemnification obligations that it has to the buyers of two sold portfolio companies. Until these indemnification obligations expire, the fund must hold back adequate assets to cover those obligations. A LiquidationGap® policy is purchased by the fund to meet the hold back requirement and allow the fund to make a final distribution.
Uses by Transaction Type

Potential uses of the product include:

  • Financings and Investments
    Under construction / Coming soon
  • Licensing Agreements
    Under construction / Coming soon
  • Liquidations

    Existing contingency prevents liquidation


    A private investment fund has completed its investment program and all portfolio investments have been sold. In connection with the sale of one of its portfolio companies, the fund retained the obligation to indemnify the buyer for certain contingent liabilities that the buyer of that company was unwilling to assume. While the probability of the indemnification obligation being called upon is quite low, the fund manager is required to reserve for the full amount of the indemnification obligation until the obligation expires in two years and thus cannot make a final distribution. A LiquidationGap® policy is purchased by the fund to meet the reserve requirement and allow the fund to make a final distribution.

    Release of an escrow


    The buyer of one of a private investment fund's portfolio companies retained access to an escrow which could be utilized to satisfy certain liabilities that were identified at the time the transaction closed. While the date for the release of the unused portions of the escrow to the fund has passed, the buyer is taking an extremely conservative view of the liabilities and is unwilling to release the escrow fund. The fund manager wishes to terminate the fund and make its final distribution. Attempts to negotiate a compromise settlement have been unsuccessful. The buyer indicates that it requires a full indemnity for the amounts held in escrow before it will release the funds. The fund and buyer negotiate the release of the escrow on the condition that a LiquidationGap® policy is purchased for the benefit of the buyer to respond in the event the contingent liabilities crystallize into loss to the buyer, thereby allowing the fund to wind-up.

    Contingent liabilities relating to a settlement


    One of a private investment fund's portfolio investments became insolvent eighteen months after it was acquired. In contentious bankruptcy proceedings, the fund and its general partner were named in protracted litigation as the controlling persons of the portfolio company. The litigation was settled and releases were exchanged between most parties. There were parties to the litigation however, that could not be found and did not sign releases. The general partner is unwilling to permit liquidation of the fund because of concerns about claims being made against the fund if these parties ever attempted to claim against it for the released matters. A LiquidationGap® policy is purchased by the general partner to respond in the event that claims are made against it for the released matters allowing the fund to liquidate.

    Outstanding indemnification obligation prevents liquidation


    A private investment fund has completed the sale of all of its investments but cannot make a final distribution because of continuing indemnification obligations that it has to the buyers of two sold portfolio companies. Until these indemnification obligations expire, the fund must hold back adequate assets to cover those obligations. A LiquidationGap® policy is purchased by the fund to meet the hold back requirement and allow the fund to make a final distribution.
  • Mergers and Acquisitions
    Under construction / Coming soon
  • Restructurings and Workouts
    Under construction / Coming soon
FAQs

FAQs:

  • When in a fund’s life-cycle can LiquidationGap® Insurance Policy for Private Investment Funds be most effectively utilized?
    LiquidationGap® Insurance Policy for Private Investment Funds is intended to be sold at a time when the fund's investment program has been completed, the proceeds of that investment program have been realized and there are minimal outstanding trailing liabilities under either sale agreements or identified liabilities.
  • Can LiquidationGap® Insurance Policy for Private Investment Funds be used to cover exposures to which the fund might become liable under specific indemnities that it has given on a scheduled basis?
    Yes. In fact, scheduling the specific exposures that are covered under a LiquidationGap® policy is often a more cost and time-effective manner for the fund to purchase coverage.
  • The fund’s manager/advisor purchases fund D&O/E&O coverage. Would the purchase of LiquidationGap® Insurance Policy for Private Investment Funds be duplicative?
    Most fund manager D&O/E&O policies do not provide coverage for contractual exposures. Many of the trailing liabilities of the liquidating fund could relate to liabilities assumed under sale purchase exclusions. As such, coverage for these exposures may not be covered under fund D&O/E&O policies. In addition, a LiquidationGap® policy has the ability to cover identified contingency known or potential exposures of the liquidating fund. These exposures may or may not be covered under the Fund Manager D&O/E&O program. Finally, LiquidationGap® Insurance Policy for Private Investment Funds is designed to provide fund managers with the peace of mind necessary to make a final distribution to the fund's partners or interest holders without any concern about needing to "claw-back" distributions already made to a partner or the holder of an interest in that fund.
  • There appear to be elements of D&O and E&O cover already provided for the fund’s manager or advisor. Is LiquidationGap® Insurance Policy for Private Investment Funds intended to be primary or excess of this coverage?
    To the extent that there is D&O and E&O coverage for the fund manager and advisors, coverage is excess of that provided under the general D&O/E&O program. Of course, if you are satisfied that the fund's D&O/E&O coverage requirements have been fully met, deleting the D&O/E&O coverages provided in the LiquidationGap® policy can be a more cost effective solution for your client.
  • How long does it take to underwrite a LiquidationGap® policy?
    Generally we can provide preliminary terms within 24 to 48 hours. Completion of full underwriting is dependent on how quickly detailed information is provided to Ambridge. Ambridge frequently can offer bindable terms within several days after receipt of the initial submission.