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Insurance for Private Investment Funds

LiquidationGap® coverage is provided to private investment funds for loss caused by identified or unknown potential exposures, whether contractual or otherwise, that do not crystallize until after the date that the insured liquidates.

LiquidationGap® Insurance can facilitate the accelerated wind-up or liquidation of a private investment fund by providing insurance for exposures that would otherwise require reserves or holdbacks, enabling fund managers to make a final distribution to the fund's partners or interest holders.

LiquidationGap® 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 previously made.

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 distributing as quickly as possible. However, general partners must decide whether or not to maintain cash on hand to cover contingent liabilities—no matter how remote—and what the amount of holdback should be. Such reserves or holdbacks can be an inefficient use of capital, and may preclude private fund investors and managers from generating the type of returns they expect.

LiquidationGap® Insurance is designed for liquidating private investment funds but can be modified to respond to liquidations of other entities. Coverage can also be extended to include heirs, assigns, estates, spouses, and domestic partners of the fund managers.

LiquidationGap® Insurance provides coverage for identified or unidentified contingent obligations which fund managers would otherwise account for by way of reserves or holdbacks.

LiquidationGap® Insurance can be particularly responsive where an existing contingency or outstanding indemnification obligation would prevent liquidation. Coverage can also include typical run-off management liability exposures, and specific exposures can be scheduled for cost and time efficiency.

LiquidationGap® Insurance Case Studies

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. As a solution, a LiquidationGap® policy may be obtained by the fund to meet the reserve requirement and allow the fund to make a final distribution.

The buyer of one of a private investment fund's portfolio companies retained access to an escrow that could be utilized to satisfy certain liabilities 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 may 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.

One of a private investment fund's portfolio investments became insolvent 18 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 may be obtained by the general partner to respond in the event that claims are made against it for the released matters, allowing the fund to liquidate.

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 may be obtained by the fund to meet the hold back requirement and allow the fund to make a final distribution.

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Frequently asked questions

LiquidationGap® Insurance 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

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.

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, these exposures may not be covered under fund D&O/E&O policies. In additional contractual exposures, a LiquidationGap® policy has the ability to cover identified or potential contingent exposures of the liquidating fund, which may or may not be covered under the fund manager D&O/E&O program.

LiquidationGap® coverage would be excess of any D&O and E&O coverage for the fund manager and advisors that is provided under the fund’s 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.

Generally, we can provide preliminary terms within 24 to 48 hours. Completion of full underwriting is dependent upon how quickly detailed information is provided to Ambridge. Ambridge frequently can offer bindable terms within several days after receipt of the initial submission.