Buzz Archive:
Pledge Funds: Commentary and Model Term Sheet

by Joseph W. Bartlett, Founder of VC Experts.com, 11/15/2007

For some time Joe Bartlett, Editor in Chief at VC Experts, has been talking to clients faced with the difficulty of raising private equity funds on standard terms and suggests they consider what is called 'pledge' or 'synthetic funds.'

His comments: I remind them that Forstmann Little started off as a pledge fund and then segued into a major private equity fund, until its wind up a few years ago. It is interesting that in the September 2007 edition of The Private Equity Analyst there is an article identifying four groups which are working with what the author, Mathew Monks, call "Fundless Firms." The article suggests that the Fundless Firms suffers a drawback in that the managers do not draw management fees. My model, see the following materials from The Encyclopedia of Private Equity and Venture Capital, contemplates a commitment by a limited group of investors to a management fee and an undertaking (but not a commitment) to review transactions as presented on a deal-by-deal basis. As I understand it, one of the major funds in this country, General Atlantic, operates without the necessity of a formal fund document. The managers of General Atlantic present deals to a stable group of long time investors, which in turn invest as the deals are presented.

Thus, in today's difficult environment, it may well make sense, given the extraordinary length of time and due diligence hurdles imposed by skittish investors, to switch the model from a standard private equity fund to what is currently called a "pledge" or "synthetic" fund. The difference is that, in a pledge fund, the investors' commitments are neither absolute nor committed for a ten year period. The interested investors are shown investment opportunities by the managers and are allowed to elect to participate, or not, on a deal-by-deal basis.

That being the case, it is important to understand the basic structure of a pledge fund. In my experience, the documentation of the structure is relatively simple.