Sure. Why not? Help with cash flow and liquidity.
Can you charge interest on the deferred fees? Probably not. If the fund documents explicitly allow for interest to accrue on the deferred fees, then sure. I’m not sure I’ve seen many funds that allow this. Of course, you get in the immediate conflict of what rate of interest to charge. Best have that rate stated in the fund documents.
What did TZP Management do wrong?
The firm entered into management agreements with portfolio investments owned by the TZP funds. (The funds are not directly parties to the management agreements. The fund documents require management fee payments to offset fund fee payments. The management agreements allowed TZP to accrue 8% interest on any deferral of management fees.
The charging interest is not a great look. I suppose you could argue that it washes out because the accrued interest will also offset.
[Wait]
TZP did not include the interest in the offsets. Oops. That’s not right. Effectively, TZP was generating additional income for itself by charging interest to the portfolio companies. What was the right rate? How did it come up with 8%? Unanswered.
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