GP-LP agreements: A closer look at one-sided terms and commingled funds

A Paul, Weiss study has found that one-sided fund terms, including the right to opt out of specific investments, may be difficult to implement in a commingled fund structure. Tailored solutions may be necessary for LPs to address pressure from GPs. The study suggests that LPs should consider seeking tailored solutions to address their concerns and negotiate better terms with GPs.

The hedge fund industry has seen a significant rise in the adoption of separately managed accounts (SMAs) over the past decade. According to a study by Philippa Allen, Managing Director of Regulatory Compliance at IQ-EQ, assets under management (AUM) invested in hedge funds via SMAs have increased approximately sixfold since 2010, more than doubling as a percentage of total hedge fund assets [1]. This trend is driven by traditional allocators, asset owners, and multi-manager platforms seeking greater control and transparency over their investments.

The momentum has accelerated in recent years. Globally, hedge funds experienced a nearly 50% increase in investor requests for investment via SMAs in 2024 alone [1]. This surge in demand reflects a broader shift in how hedge fund launches are being structured, with many of the largest launches now anchored by platforms rather than traditional seeders. The SMA route is increasingly replacing seeders as the dominant form of anchoring new hedge fund strategies.

SMAs offer distinct advantages for both managers and investors. For managers, key benefits include access to investor capital that may not otherwise be available, the ability to focus on investing, and an opportunity to deepen relationships with allocators and investors. For investors, SMAs provide transparency and greater control over investments, the potential for portfolio customization tailored to specific objectives and preferences, more control over the structure, operations, and expenses of the account, and improved capital efficiency through optimized treasury functions [1].

Despite the advantages, SMA arrangements can be complex and require careful negotiations between the parties. Key contractual considerations include most-favored nation (MFN) clauses, control and termination rights, determining whether capital is fully funded or based on gross market value (GMV), clarifying whether the structure is a pure SMA or a fund of one, liquidity, notice periods, lock-ups, and confidentiality language [1]. Additionally, there are practical compliance concerns to consider, such as pre-end-of-day transparency and reporting requirements, front-running, and the need for managers to be registered as registered investment advisors (RIAs) with the Securities and Exchange Commission (SEC) [1].

Neuberger Berman has also been successful in raising capital for its co-investment focused commingled funds and custom accounts. The firm has raised approximately $6 billion in client capital over the past 18 months, including the successful close of NB Strategic Co-Investment Partners V with over $2.8 billion in capital commitments [2]. This underscores the growing investor appetite for GP-centric strategies and reinforces Neuberger's position as a leading global private equity co-investment manager.

In conclusion, SMAs continue to play a transformative role in the fund industry, offering both managers and investors new opportunities for customization, transparency, and efficiency. While navigating SMA structures requires careful consideration of contractual terms and regulatory compliance, the growing popularity of SMAs suggests they will remain a vital component of fund investment strategies in the years ahead.

References:
[1] https://iqeq.com/insights/the-rise-of-smas-in-hedge-funds-trends-and-considerations/
[2] https://www.prnewswire.com/news-releases/neuberger-berman-closes-nb-strategic-co-investment-partners-v-fund-above-target-at-2-8-billion-302505921.html