Other important legal issues to consider

Key Considerations:

  • How should the Water Fund structure its day-to-day management and operation?
  • Can the interests in a Water Fund be transferred?
  • What is a typical term for a Water Fund?

How Should the Water Fund Structure its Day-to-Day Management and Operation?

Funds typically are structured so that the day-to-day management and operation of the fund is undertaken by the officers of the fund (in the case of a corporation), the general partner of the fund (in the case of a limited partnership) or the managing member(s) of the fund (in the case of a limited liability company). In each of the aforementioned situations, the officers and employees of the applicable entity generally will control the day-to-day operation of the fund and will oversee the underlying projects in which the water fund invests. However, certain approval rights involving management matters may be granted to the contributors to the water fund in which case matters subject to such approval would require the approval of the water fund’s contributors (see also “What Control and Voting Rights Should be Considered by the Water Fund?” and “What Additional Rights may Financing Sources Seek?”).

In order to effectively establish the management and operational constructs of the water fund, key roles should be defined for the staff responsible for the management of the particular fund. Set forth below are certain operational considerations that should be addressed when establishing the water fund:

  • Investment Decisions and Project Management

    Determine the process for making investment decisions (e.g., selection of investments, deployment of capital, and dispositions of assets) and project management (e.g., who will be responsible for the overall oversight regarding particular projects).
  • Contributor Reporting

    Define the scope of the reporting that will be provided to contributors and who will be responsible for providing such reports to the contributors.
  • Regulatory Compliance

    Dedicated personnel of the fund sponsor should be responsible for ensuring compliance with the applicable laws of jurisdiction(s) of the water fund and its contributors as well as those in which the water fund is operating.
  • Oversight

    To the extent the water fund has a board (e.g., in the case of a corporation) or an advisory committee of contributors, the fund should implement a process for communicating matters with the board/committee and appoint a liaison who is primarily responsible for such communications.

Can the Interests in a Water Fund be Transferred?

The transferability of a contributor’s interests in the water fund generally will be subject to certain restrictions to ensure that the transfer does not violate applicable securities laws. Such transfers may require the approval of the governing body of or the other contributors to the water fund, which consent is generally provided unless the transfer will result in a material adverse effect on the other contributors or the operations of the fund. Moreover, a fund may require that contributors seeking to dispose of their interests first offer such interests to the existing contributors to the fund.

What is a Typical Term for a Water Fund?

While most investment funds generally have a term of approximately 10 years, certain infrastructure funds typically have longer terms that range from 10-20 years, though 20 years is highly unusual. However, these terms are premised on the idea that the fund will ultimately return capital and profits to investors. Where there is no such intent, the term of the fund may be indefinite.

The terms of for-profit funds are typically defined by the target assets the fund seeks to acquire. Due to the illiquid nature of the assets of most infrastructure funds, most infrastructure funds are structured as “closed-end” funds, meaning they have a defined term and the contributors generally do not have the ability to redeem their investments. However, certain infrastructure funds utilize an “open-end” structure, meaning they have indefinite terms and offer their contributors redemption rights, usually subject to a long “lock-up” period during which the contributors may not redeem their interests. The key obstacle to using an open-end fund structure for infrastructure funds, such as the water funds, is that the assets tend to be illiquid and the sponsor may not be able to satisfy the redemption requests.