A second contractual arrangement common for international venture capital funds is the management agreement. This is an agreement under which a management company agrees to provide management and administrative services to the limited partnership and/or the general partner. The management company frequently is closely affiliated with the general partner. Under the management agreement, the management company generally agrees to seek investment opportunities, monitor the performance of portfolio investments, help portfolio companies grow and prosper, and ultimately assist in exiting the investment. The management company is paid a management fee for these services, which is generally a percentage of the size of the fund.
Important Consideration in Legal Documents
Legal documents to establish venture capital entities attempt to set in place appropriate incentives for implementing the investment strategy. They should also address potential conflict issues, help negotiate circumstances regarding a questionable decision, and protect against changes that could ultimately impact return on the investment. Attorneys representing fund managers should structure legal documents so the fund manager is compensated for the value it has added.
The Impact of Evolving Market Conditions
As noted above, over the past fifteen to twenty years, there has been increasing interest on the part of international institutional investors in making private portfolio investments in emerging markets. This strong interest provided fund managers with considerable leverage in negotiating the terms and conditions of the fund formation documents. As funds organized in the 1990s failed to obtain the anticipated results, the climate has changed. Today, it is much more difficult to raise new emerging market venture capital funds (excluding funds focused on India and China). Investors generally have more leverage with respect to the specific terms of the fund document. However, the basic structure remains in place and has become a market standard.