Uncertain investor funding can make sellers and lenders reluctant to engage with deal-by-deal funds, while also increasing the risk of sponsors absorbing broken deal expenses. On the other hand, the unique treatment of carried interest – not netting losing investments and immediately receiving payment upon selling an investment – presents undeniable upside that may make the risks worthwhile. Weighing those fiscal considerations, among others, against each other is part of the complicated calculus sponsors must perform when deciding whether to adopt the deal-by-deal fund structure. This final article in a three-part series analyzes the risks of deal uncertainty; ways sponsors can overcome those risks; and the unique approaches to management fees and carried interest that can make the deal-by-deal structure appealing. The first article
provided an overview of the deal-by-deal fund vehicle and how it is perceived by investors. The second article
described some challenges posed by the fundraising process, as well as important structural and mechanical considerations when establishing a deal-by-deal fund. See our three-part series on pledge funds: “High Upside Fee Structure and Other Incentives for Adoption
” (Apr. 9, 2019); “Key Investment Management Agreement Provisions
” (Apr. 16, 2019); and “Deal Uncertainty Issues and Three Investment Vehicle Structures
” (Apr. 23, 2019).