Private Equity Investing in Trust– the Fiduciary Duty of Oversight Requires Robust Process to Avoid Liability

I recently wrote an article, “Private Equity Investing in Trust”, featured in the July 2010 issue of Trusts & Estates magazine which points to a rising risk of exposure to personal liability for Trustees, co-trustees, and other professional fiduciaries who fail to exercise their duty of oversight before and after making investments in private equity and venture capital.

The article, which you may read in full by clicking HERE, makes the following key points:

  • Sophisticated trust portfolios often benefit from direct exposure to active and passive investments made in venture capital and private equity. However, if a trustee is not a lead sponsor of such investments and cannot control the terms of subsequent financings, challenges often arise in determining whether to continue to fund these investments and how to properly assess the economic impact of a pending financing.
  • One of the unintended consequences of the global financial crisis for venture-backed and other private equity companies is increased stress among investor syndicates.
  • It is critical that the fiduciary show the completion of a process of diligent review prior to making such decisions in order to fulfill a trustee’s duty of oversight.
  • Ongoing investment participation may also benefit from a trustee’s active board representation or, if a trustee is not a professional experienced in assessing, managing, and exiting illiquid investments, delegation of such duties to one who is.
  • To properly exercise the fiduciary duty of oversight, trustees and other fiduciaries must implement far more than a cursory process of review before dismissing or choosing to continue to fund an illiquid investment.

These issues are particularly relevant to family office investors who may not be aware of their potential liability exposure for illiquid investments they have made in trusts where the trustees who make the decisions are not the only beneficiaries.

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