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Legacy assets: all cost and no upside

12 April 2018

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At the tail end of a fund’s life, after its portfolio investments have all been sold or transferred, by way of an alternative liquidity solution, some assets may still remain behind and could delay an orderly fund wind down.

More often than not, these legacy assets are of no value which exacerbates the problem faced by investors and managers. Keeping a fund open to work through these legacy assets delivers no (or almost no) upside, but it does prolong the fund’s running costs (including audit, tax and legal) and it unnecessarily distracts a manager who’s already focusing on a successor fund.

Typically, these legacy assets comprise empty onshore or offshore Special Purpose Vehicles (SPVs) wholly owned by the fund, such as holding companies previously used in cross-border acquisition structures. Other types of assets that often remain behind are written off loans or equity in privately held companies, as well as other types of contractual rights that have no, or only a de-minimis value.

Depending on the type of asset, it may take weeks, months or more than a year to liquidate, wind down, work through, or execute whatever action is required to eliminate that asset from the fund’s balance sheet. In some cases, there’s a contractual reason why an asset should be kept in place for a defined or unknown period of time, well exceeding the fund’s normal term plus extensions. This could be the case for SPVs that hold insurance policies or those that are named in ongoing litigation. In these cases, the fund isn’t an efficient holding structure for these assets while they undergo their respective processes. Managers also often don’t want to transfer such SPVs to the manager’s vehicle.

It’s clear that in these situations, both managers and investors would benefit from a cost efficient solution that allows them to transfer such a legacy asset from the fund’s balance sheet, and no longer having to remain involved in the process afterwards.

A solution

A solution to these challenges is an orphaned offshore acquisition structure, set up to acquire the legacy assets of a specific fund. This acquisition structure consists of a holding company (Holdco) that in turn is owned by a charitable trust (Trust), of which Intertrust is the trustee. The Holdco would acquire for nominal value (e.g. one US dollar) any remaining fund assets, and charge to the fund a one-time fee for specific services that need to be rendered with respect to those assets after the transfer, for example, to liquidate onshore and/or offshore SPVs.

If a legacy asset has a small current value, or could result in a small potential future value, it’s essential that prior to restructuring, investors and managers, in accordance with their contractual fund arrangements, agree to abandon this value. Any amounts after distribution to the Trust, are often donated to charity explaining the use of a charitable trust as the top entity in the acquisition structure.

Ordinarily, the value of these assets is so small compared to the fund’s running costs that continued ownership through the fund, cannot be justified. Using a solution like an acquisition structure is an efficiency tool that allows managers and investors to close down a fund expeditiously. At the same time, they avoid unnecessary third party fund expenses and remove manager distractions.

Case study

Recently, we worked on a transaction that regarded the liquidation of six empty Dutch SPVs that had been previously used in the holding and financing structure for a portfolio investment. Using a legacy asset solution allowed the fund to transfer these SPVs to a Holdco where the liquidation process in the Netherlands would be handled by our Amsterdam office. This meant that the fund would avoid having to run for at least another 9 – 12 months, eliminating any further involvement from the manager.


If you have any queries or would like to discuss further, please contact Dennis van den Broek.