Side Pocket Agreement

A Side Pocket Agreement: Understanding Its Significance in the World of Investing

The world of investing is full of complex agreements and terminologies that can confuse even the most seasoned investors. One such term is the Side Pocket Agreement, which has gained popularity among investment funds, especially private equity funds. In this article, we will discuss what exactly a Side Pocket Agreement is, how it works, and its significance in the world of investing.

What is a Side Pocket Agreement?

A Side Pocket Agreement, also known as a Side Pocket Account, is a provision in an investment fund that allows the fund manager to segregate certain assets from the primary pool of the fund. Essentially, it creates a separate account for assets that are difficult to value or liquidate, or those that require long-term investments. These assets can include real estate properties, distressed debt, and illiquid securities.

How does a Side Pocket Agreement work?

When a fund manager decides to use a Side Pocket Agreement, they will create a separate account, which is distinct from the primary pool of assets. The assets that are moved to the Side Pocket Account are usually those that are difficult to sell, have a long-term horizon, or are undergoing restructuring. This segregation protects the value of the remaining assets in the fund while giving the fund manager time to manage the problematic assets in the Side Pocket Account.

The Side Pocket Account investors receive a share of the profits and losses generated by the assets in the account. However, they do not have the same rights and privileges as the primary pool investors. For instance, they may not be able to redeem their shares as quickly as primary pool investors.

Why are Side Pocket Agreements significant in the world of investing?

The use of Side Pocket Agreements has become increasingly popular among private equity funds. These funds invest in illiquid assets and have a long-term investment horizon. Therefore, the ability to segregate problematic assets and protect the value of the remaining assets is significant.

Moreover, Side Pocket Agreements help to provide transparency and accuracy in the valuation of assets. Assets that are moved to the Side Pocket Account are typically those that are difficult to value accurately. By segregating them, the fund manager can manage them carefully and ensure that they are valued appropriately.

Finally, Side Pocket Agreements are beneficial to investors who want to invest in private equity funds. They provide greater flexibility for fund managers to manage and restructure underperforming assets while protecting the value of the remaining assets in the fund.

Conclusion

In conclusion, a Side Pocket Agreement is a provision in an investment fund that allows a fund manager to segregate certain assets from the primary pool of assets. The Side Pocket Account is beneficial for protecting the value of the remaining assets, providing transparency and accuracy in asset valuation, and greater flexibility for fund managers in managing illiquid assets. As an investor, it is essential to understand the significance of Side Pocket Agreements when investing in private equity funds.