Co-Investment Funds and Sponsor Fiduciary Duties under the US Advisers Act

We are often asked whether fiduciary duties apply to sponsors of co-investment vehicles. Co-investment vehicles are funds (i.e., third party managed investment pools), but unlike a “blind pool fund,” where the manager is given discretion to select investments, a co-investment vehicle often targets a single identified portfolio company. Nonetheless, as in a blind pool fund, investors in a co-investment vehicle delegate the management of the “pool” of funds to a third-party sponsor. Often the co-investment fund will invest alongside the blind pool fund (the “Main Fund”). Accordingly, it is important to consider whether the sponsors’ duties to such investors mirror those duties that managers have to investors in a blind pool fund – in particular, whether the fiduciary duty standard under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”) applies to the management of co-investment vehicles.

An investment adviser’s fiduciary duty under the Advisers Act includes both a duty of care and a duty of loyalty to its clients. While the application of this fiduciary duty may vary with the scope of the client relationship, it is not permissible for an investment adviser subject to the Advisers Act to contract out of its statutory Advisers Act fiduciary duties. This is in contrast to fiduciary duties established under relevant partnership law (such as the Delaware Revised Uniform Partnership Act), which may permit the waiver of fiduciary duties pursuant to the contract. However, in order for the Advisers Act fiduciary duty standard to apply to the sponsor of a co-investment fund, the sponsor must fit within the definition of an “investment adviser” under the Advisers Act, and the services provided must be investment advisory services. Under Section 202(a)(11) of the Advisers Act, an “investment adviser” is a person who engages in the business of advising others (third parties) with regard to investing in, purchasing or selling securities for compensation. Each of the elements of the definition of “investment adviser” must be met for the definition to apply. This article assesses whether the sponsor of a co-investment fund meets the foregoing criteria such that the Advisers Act fiduciary duty standard would apply.