Proper Use of Funds & Fiduciary Duties in Independent Sponsor Deals

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by an investor from University of Oxford
in Hamburg, Germany

1yr ago

Proper Use of Funds & Fiduciary Duties in Independent Sponsor Deals

Hello Searchfunder Community,

As I prepare for my first investment in an independent sponsor deal, I was wondering how I could best ensure funds are being used as intended (e.g., to acquire a company) and fiduciary duties are upheld throughout the lifecycle of the deal.

For those with experience:

- What is standard practice in terms of wiring funds?

- What oversight mechanisms help verify fund usage?

- Any red flags or warning signs to watch for?

- Do you require specific financial reporting, escrow, or audits?

- How can smaller investors ensure fiduciary duties are fulfilled throughout the deal?

Looking forward to your insights—thanks in advance!

1 Like

303 Views

reply by an investor 1yr ago
from Dartmouth College in 80 S Main St, Hanover, NH 03755, USA

Limited response to a broad and excellent topic that could benefit from more sharing of best practices:
most (not all, but most) independent sponsor deals do not employ GP/LP structure, but utilize LLCs and structured equity structures to effect similar but not identical governance and economic partnership dynamics. Importantly, the default fiduciary responsibilities are much more "open" so contracting to a "fiduciary" standard in these partnerships can be more elusive. Reporting is also pretty "open" so best practice is to set expectations in writing from the sponsor and those should be reflected in the partnership agreement (regular, synthesized, objective reporting is often an afterthought in independent sponsor deals once the deal gets going if not documented up front). In terms of diligence - no substitute for triangulating to others who know the sponsor and/or who may be participating in the investment with you. Great post and topic!

reply by a professional 1yr ago
from Widener University in Philadelphia, PA, USA

Strong governance documents is Step 1. Someone mentioned taking a look at the ILPA documents. That's a good start. If there are any specific concerns or questions then you should run them by an attorney. Feel free to email me if you want to chat more about this: redacted