CONFIDENTIAL — PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1585 Broadway, 34th Floor New York, NY 10036
MEMORANDUM
TO: Members of the Investor Advisory Committee of Driftwood Absolute Return Fund Ltd.:
Diana Cortland, Chief Investment Officer, Northvale Public Employees' Retirement System (IAC Chair)
Richard Oshima, Director of Alternative Investments, Sycamore Endowment Partners LP
Catherine Mercer, Managing Director, Velthorn Institutional Fund of Funds III, L.P.
Thomas Ashworth, Principal, Bridlewood Family Office Holdings Ltd.
Nadia Al-Rashid, Senior Portfolio Manager, Atlas Sovereign Wealth Advisory LLC
FROM: Graham Sutherland, Responsible Partner, Funds & Asset Management, Calderwood & Harkness LLP; Stephen Adler, Lead Associate, Funds & Asset Management, Calderwood & Harkness LLP
CC: Helen M. Calloway, Partner, Investment Funds Group, Wexford Crane & Albright LLP (IAC Counsel); David Pineda, Senior Associate, Wexford Crane & Albright LLP
DATE: July 29, 2024
RE: Briefing Memorandum for Investor Advisory Committee Meeting — Key Person Event, Successor Key Person Proposal, and First Amendment to the Amended & Restated Limited Partnership Agreement of Driftwood Absolute Return Fund Ltd.
Matter No.: 1024-00002
Right-click to update Table of Contents
I. Purpose of This Memorandum
This memorandum has been prepared by Calderwood & Harkness LLP, in its capacity as fund counsel to Driftwood Capital Management LLC ("DCM" or the "General Partner") and Driftwood Absolute Return Fund Ltd. ("DARF" or the "Fund"), at the request of DCM, to brief the Investor Advisory Committee (the "IAC") in advance of its meeting scheduled for July 29, 2024.
The purpose of this memorandum is to provide the IAC with a comprehensive summary of the following matters, each of which is expected to be discussed at the upcoming meeting:
(i) the Key Person Event that occurred on June 10, 2024, following the incapacitation of Marcus J. Whitmore, Founder and Chief Investment Officer of DCM;
(ii) the Successor Key Person Proposal circulated to all limited partners of the Fund on July 15, 2024, pursuant to which Elaine R. Sato and Jonathan K. Huang have been proposed as joint Successor Key Persons;
(iii) the proposed First Amendment to the Amended & Restated Limited Partnership Agreement of Driftwood Absolute Return Fund Ltd. (the "A&R LPA"), dated March 15, 2017, which implements the Successor Key Person Proposal and introduces certain governance enhancements, including the creation of an Investment Committee and modifications to the carried interest allocation structure; and
(iv) the IAC's specific role in the proposed successor governance framework, including the designation of an independent member to the newly created three-member Investment Committee, and the significance of the IAC members' collective voting weight in the LP consent solicitation.
We note that IAC counsel, Wexford Crane & Albright LLP ("WCA"), specifically Helen M. Calloway, Partner, and David Pineda, Senior Associate, has been provided with copies of all materials referenced herein, including the draft First Amendment, the Successor Key Person Proposal, and all supporting documentation. WCA is independently reviewing the proposed amendment on behalf of the IAC and is expected to provide its comments and recommendations to the IAC members separately. This memorandum is prepared by Calderwood & Harkness LLP in its capacity as fund counsel and does not purport to serve as independent legal advice to the IAC or any individual IAC member. Each IAC member should consult with its own legal counsel and with WCA as appropriate.
II. Executive Summary
The following is a summary of the key facts, events, and proposals that are the subject of this memorandum. Each item is discussed in greater detail in the sections that follow.
Key Person Event. Marcus J. Whitmore, Founder, Chief Investment Officer, and sole designated "Key Person" under Section 8.04(a) of the A&R LPA, suffered a severe hemorrhagic stroke on June 3, 2024. Mr. Whitmore has been unable to perform any professional duties since that date, and his physicians have projected a minimum twelve- to eighteen-month recovery period with an uncertain return-to-work prognosis. Pursuant to Section 8.04(b) of the A&R LPA, a Key Person Event was deemed triggered on June 10, 2024, upon the expiration of seven consecutive calendar days during which Mr. Whitmore was unable to devote substantially all of his professional time to the affairs of the Fund.
Consequences Triggered. Immediately upon the occurrence of the Key Person Event, the consequences prescribed by Section 8.04(c) of the A&R LPA took effect, including: (a) an immediate suspension of the Investment Period, pursuant to which no new investments may be made by the Fund; (b) a cap on follow-on investments of $28.7 million, representing 1.0% of the Fund's assets under management as of the trigger date; and (c) the commencement of a ninety-calendar-day Cure Period, which began on June 10, 2024 and is scheduled to expire on September 8, 2024.
LP Notification. The General Partner sent written notification of the Key Person Event to all limited partners on June 14, 2024, which was within the contractual five-business-day deadline prescribed by Section 8.04(c)(iii) of the A&R LPA. The required deadline for such notification was June 17, 2024, and the General Partner's notice was therefore timely delivered.
Successor Key Person Proposal. On July 15, 2024, the General Partner circulated to all forty-seven limited partners of the Fund the Successor Key Person Proposal (the "Proposal"), together with a draft First Amendment to the A&R LPA. The Proposal designates Elaine R. Sato, Deputy Chief Investment Officer and Managing Member (10%) of DCM, and Jonathan K. Huang, Head of Credit Strategies at DCM, as joint Successor Key Persons. The Proposal further introduces a series of governance enhancements, including the creation of a three-member Investment Committee.
LP Consent Deadline and Threshold. The LP consent deadline for the First Amendment is August 23, 2024, which is forty calendar days from the date of circulation. The required approval threshold is consent of limited partners holding at least 66⅔% of aggregate LP capital commitments, excluding the General Partner's co-investment. Based on voting LP commitments of $2,798.25 million, the required consent threshold is $1,865.50 million.
IAC Role. The proposed amendment would empower the IAC to designate one independent member to the newly created three-member Investment Committee, representing a material governance enhancement and a new fiduciary check on the General Partner's investment discretion. The five IAC members collectively hold $1,140 million in voting LP capital commitments, representing approximately 40.7% of total voting LP commitments, and their collective support is therefore a critical — though not independently sufficient — factor in achieving the required 66⅔% consent threshold.
Timeline Urgency. As of the date of this memorandum, forty-nine days of the ninety-day Cure Period have elapsed, and forty-one days remain. The LP Consent Deadline of August 23, 2024 falls sixteen days before the Cure Period expiration on September 8, 2024. If sufficient LP consent is not obtained by August 23, the General Partner would have limited time to seek modifications or an extension before the Cure Period expires, at which point limited partners holding a majority-in-interest would have the right to elect an orderly wind-down of the Fund.
III. Background on the Fund
A. Fund Overview
The following sets forth certain summary information regarding the Fund:
Full Legal Name: Driftwood Absolute Return Fund Ltd.
Entity Type: Exempted limited partnership registered in the Cayman Islands under the Exempted Limited Partnership Act (As Revised). Cayman Registration No. ELP-87234. The limited partnership agreement of the Fund is governed by the laws of the State of Delaware.
Registered Office (Cayman): 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1104, Cayman Islands.
Registered Agent (Cayman): Archipelago Corporate Services Ltd., P.O. Box 2681, George Town, Grand Cayman, KY1-1111, Cayman Islands.
Inception Date: March 15, 2017. The Fund completed its initial closing on March 15, 2017, and has conducted several subsequent closings since inception.
Investment Strategy: The Fund pursues a multi-strategy absolute return approach encompassing three primary strategy verticals: (a) equity long/short, (b) event-driven, and (c) credit relative value. The Fund maintains a particular sector focus on asset management and banking industries, where the investment team has deep expertise and long-standing relationships. The Fund's objective is to generate consistent, risk-adjusted absolute returns across market cycles with low correlation to broad equity and fixed income indices.
Number of Limited Partners: Forty-seven (47) limited partners as of the date of this memorandum, consisting of a diverse base of institutional investors including public pension plans, endowments, foundations, fund-of-funds vehicles, family offices, and sovereign wealth advisory entities.
B. General Partner
Full Legal Name: Driftwood Capital Management LLC.
Entity Type: Limited liability company organized under the laws of the State of Delaware. Employer Identification Number (EIN): 82-4917653.
Principal Office: 680 Lexington Avenue, 31st Floor, New York, NY 10022.
Delaware Registered Agent: Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, DE 19801.
Managing Members: The General Partner has two managing members:
(a) Marcus J. Whitmore — Founder and Chief Investment Officer, holding a ninety percent (90%) membership interest in DCM; and
(b) Elaine R. Sato — Deputy Chief Investment Officer, holding a ten percent (10%) membership interest in DCM.
Mr. Whitmore has served as the sole designated Key Person under the A&R LPA since the inception of the Fund. Ms. Sato has served as Deputy CIO and has been a managing member of DCM since the Fund's formation. The governance structure of DCM and the allocation of authority between the managing members are governed by the Operating Agreement of Driftwood Capital Management LLC, which is not directly at issue in this memorandum but is relevant to the proposed carried interest reallocation discussed in Section VII.F below.
C. Key Service Providers
The following service providers are engaged by the Fund in connection with its ongoing operations:
Fund Administrator: Pinnacle Fund Services (Cayman) Ltd., 2nd Floor, Century Yard, Cricket Square, George Town, Grand Cayman, KY1-1205, Cayman Islands. Pinnacle serves as the Fund's independent administrator and is responsible for NAV calculations, investor reporting, capital call and distribution processing, and anti-money laundering compliance.
Auditor: Graystone & Whitfield LLP, 6th Floor, Anderson Square, George Town, Grand Cayman, KY1-1104, Cayman Islands. Graystone & Whitfield has served as the Fund's independent auditor since inception and has issued unqualified audit opinions for each fiscal year since the Fund's formation. The Fund's most recent audited financial statements are for the fiscal year ended December 31, 2023.
Prime Broker: Halcyon Securities International Ltd., 25 Cabot Square, Canary Wharf, London E14 4QA, United Kingdom. Halcyon provides prime brokerage services to the Fund, including trade execution, securities lending, leverage, and custody of the Fund's investment portfolio. The Fund's relationship with Halcyon has been in place since inception.
D. Fund Performance and Financial Summary (as of May 31, 2024)
The following performance and financial data are as of May 31, 2024, as reported by Pinnacle Fund Services (Cayman) Ltd., the Fund's independent administrator:
As reflected in the table above, the Fund continues to generate positive returns and is currently trading above its high-water mark. The investment team, led by Ms. Sato and Mr. Huang in the absence of Mr. Whitmore, has maintained strong positioning across all three strategy verticals notwithstanding the occurrence of the Key Person Event. The Fund's year-to-date net return of +5.4% compares favorably to its peer group, and the current NAV per unit of $150.53 exceeds the high-water mark of $142.67 by approximately 5.5%, indicating that the incentive allocation mechanism remains "in the money" for the General Partner. The Fund's gross leverage of 1.85× and net exposure of 0.60× are within the Fund's stated risk parameters as set forth in the A&R LPA and the Fund's offering memorandum.
IV. The Key Person Event
A. Factual Background
Marcus J. Whitmore is the Founder and Chief Investment Officer of Driftwood Capital Management LLC and has served in that capacity since the Fund's inception on March 15, 2017. Mr. Whitmore brings twenty-eight years of investment management experience to the Fund. Prior to founding DCM, Mr. Whitmore served as a Managing Director at Veltrano Asset Partners LLC from 2004 to 2016, where he was responsible for managing multi-strategy portfolios with assets under management in excess of $1.5 billion. Before joining Veltrano, Mr. Whitmore served as a portfolio manager at Fieldstone Capital Advisors LP from 1996 to 2004, where he developed expertise in equity long/short and event-driven strategies in the financial services sector.
Mr. Whitmore is the sole designated "Key Person" under Section 8.04(a) of the A&R LPA, dated March 15, 2017. The designation of Mr. Whitmore as the sole Key Person reflected his foundational role in the Fund's investment strategy, his personal relationships with the Fund's institutional investor base, and his singular authority over all material investment decisions during the Fund's operating history.
On June 3, 2024, Mr. Whitmore suffered a severe hemorrhagic stroke. Mr. Whitmore was transported to Lenox Hill Medical Center in New York, where he underwent emergency neurosurgical intervention. Mr. Whitmore has been unable to perform any professional duties since the date of the stroke. He is currently in intensive rehabilitation at Lenox Hill Medical Center, where his medical team is focused on neurological recovery and physical rehabilitation.
Based on information provided by Mr. Whitmore's medical team to the General Partner, Mr. Whitmore's physicians project a minimum twelve- to eighteen-month recovery period. The return-to-work prognosis remains uncertain, and Mr. Whitmore's physicians have indicated that even upon completion of rehabilitation, Mr. Whitmore's ability to resume the full scope of his prior professional responsibilities cannot be assured at this time. The General Partner has engaged an independent medical consultant to provide periodic updates to the Fund's limited partners regarding Mr. Whitmore's recovery status, consistent with the General Partner's obligations of good faith and fair dealing under the A&R LPA.
Mr. Whitmore's capital commitment to the Fund is $57.4 million, representing approximately 2.0% of the Fund's assets under management. This commitment was made through the General Partner vehicle and is excluded from the calculation of voting LP capital commitments for purposes of the consent solicitation, as discussed in Section VII.H below.
B. Contractual Trigger Analysis
Section 8.04(b) of the A&R LPA provides that a Key Person Event is deemed to have occurred if the Key Person is "unable to devote substantially all of his professional time to the affairs of the Partnership for a period of seven (7) consecutive calendar days," absent prior written notice to the limited partners that the Key Person anticipates such an absence. The provision is self-executing: no action by the General Partner, the limited partners, or the IAC is required to trigger the Key Person Event; rather, the event is deemed to have occurred automatically upon the satisfaction of the seven-consecutive-calendar-day condition.
Mr. Whitmore was incapacitated beginning June 3, 2024, and has been unable to devote any professional time — let alone "substantially all" of his professional time — to the affairs of the Fund since that date. No prior written notice of anticipated absence was provided by Mr. Whitmore, as the stroke was an unforeseen medical emergency. Accordingly, the seven-consecutive-calendar-day period commenced on June 3, 2024 and expired on June 10, 2024.
A Key Person Event was therefore deemed triggered on June 10, 2024, pursuant to Section 8.04(b) of the A&R LPA. This determination has been confirmed by Calderwood & Harkness LLP, as fund counsel, and has not been disputed by any party.
C. Consequences Under Section 8.04(c)
Upon the occurrence of the Key Person Event, the following consequences were automatically triggered pursuant to Section 8.04(c) of the A&R LPA:
Investment Period Suspension. The Investment Period, as defined in Section 1.01 of the A&R LPA, was immediately suspended as of June 10, 2024. During the suspension, no new investments may be made by the Fund. This suspension remains in effect as of the date of this memorandum and will continue until the Key Person Event is cured in accordance with the A&R LPA or, if not cured, until the Fund is wound down.
Follow-on Investment Cap. Notwithstanding the suspension of the Investment Period, the General Partner retains limited authority to make follow-on investments in existing portfolio companies, subject to a cap of $28.7 million, representing 1.0% of the Fund's assets under management as of the Key Person Event trigger date. This cap is intended to protect the value of existing investments by permitting the General Partner to provide necessary follow-on capital to portfolio companies on a limited basis, while restricting the deployment of new capital during a period of governance uncertainty.
LP Notification. Section 8.04(c)(iii) of the A&R LPA requires the General Partner to notify all limited partners in writing within five (5) business days of the occurrence of a Key Person Event. The Key Person Event was triggered on June 10, 2024 (a Monday). The five-business-day deadline therefore fell on June 17, 2024 (the following Monday). The General Partner delivered written notification to all forty-seven limited partners on June 14, 2024, which was within the required timeframe. A copy of the LP Notification Letter is included as Attachment E to this memorandum.
Cure Period. Section 8.04(c)(iv) of the A&R LPA provides for a ninety-calendar-day Cure Period commencing on the date of the Key Person Event. The Cure Period commenced on June 10, 2024 and is scheduled to expire on September 8, 2024.
Cure Mechanism. During the Cure Period, the General Partner may propose one or more Successor Key Persons, subject to approval by limited partners holding at least 66⅔% of aggregate LP capital commitments (excluding the General Partner's co-investment). If approved, the Successor Key Person(s) would assume the Key Person designation, and the Investment Period suspension would be lifted.
Failure to Cure. If no Successor Key Person is approved within the Cure Period, Section 8.04(c)(v) of the A&R LPA provides that limited partners holding a majority-in-interest (i.e., more than 50% of aggregate LP capital commitments, excluding the GP co-invest) may elect one of two courses of action: (i) an extension of the Cure Period by up to an additional ninety (90) calendar days (which would extend the Cure Period to December 7, 2024), during which the General Partner may continue efforts to propose a Successor Key Person; or (ii) commencement of an orderly wind-down of the Fund in accordance with Article XII of the A&R LPA.
D. Current Status and Timeline Pressures
As of the date of this memorandum, July 29, 2024, forty-nine (49) days of the ninety-day Cure Period have elapsed. Forty-one (41) days remain until the Cure Period expiration on September 8, 2024.
The General Partner circulated the Successor Key Person Proposal and the draft First Amendment to all forty-seven limited partners on July 15, 2024, fourteen (14) days prior to the date of this memorandum. The LP Consent Deadline, as specified in the solicitation materials, is August 23, 2024, which is forty (40) calendar days from the date of circulation.
The LP Consent Deadline of August 23, 2024 falls sixteen (16) days before the Cure Period expiration date of September 8, 2024. This buffer provides a limited window during which, if the 66⅔% consent threshold is met, the First Amendment can be executed and the Key Person Event cured before the expiration of the Cure Period. If sufficient LP consent is obtained by August 23, 2024, the First Amendment is anticipated to become effective within three (3) business days of the satisfaction of the consent condition, which would be on or before August 28, 2024 — well within the Cure Period.
However, if the 66⅔% threshold is not met by August 23, 2024, the General Partner would have only sixteen days before the Cure Period expires on September 8, 2024 to either: (a) negotiate modifications to the Proposal and re-solicit consent from the LP base on an expedited basis; (b) seek a majority-in-interest LP vote to extend the Cure Period by up to an additional ninety calendar days; or (c) face the possibility of an orderly wind-down election by majority-in-interest limited partners. The IAC should be mindful of these timeline pressures in its deliberations.
V. IAC Composition and Capital Commitments
The IAC consists of five members, established pursuant to Section 9.02 of the A&R LPA. The IAC was constituted at the time of the Fund's initial closing and has served in an advisory capacity to the General Partner on matters involving potential conflicts of interest, related party transactions, valuation disputes, and other matters referred to it under the A&R LPA.
The current membership of the IAC, together with the capital commitment of each member's affiliated limited partner and such commitment as a percentage of voting LP commitments, is set forth in the following table:
The IAC members' combined capital commitments of $1,140 million represent approximately 40.7% of voting LP commitments ($1,140 million ÷ $2,798.25 million). The consent threshold required for approval of the First Amendment is $1,865.50 million (66⅔% of $2,798.25 million). Accordingly, if all five IAC members were to consent to the First Amendment, their combined commitments would represent approximately 61.1% of the required consent threshold ($1,140 million ÷ $1,865.50 million). While IAC support alone would not be sufficient to satisfy the 66⅔% threshold, it would constitute a substantial portion of the required consenting commitments and would signal strong institutional support for the Proposal among the Fund's most significant limited partners. The significance of the IAC's collective voting weight in the consent solicitation is discussed further in Section IX.B below.
VI. Proposed Successor Key Persons
The General Partner has proposed the designation of two individuals as joint Successor Key Persons under the A&R LPA, as amended by the proposed First Amendment. The qualifications and background of each proposed Successor Key Person are summarized below. Detailed biographies of each individual are provided in Attachment C to this memorandum.
A. Elaine R. Sato — Proposed Successor Key Person (Joint)
Title: Deputy Chief Investment Officer and Managing Member (10%) of Driftwood Capital Management LLC.
Experience: Ms. Sato has nineteen (19) years of experience in institutional investment management, spanning multiple strategy disciplines and market cycles.
Career History: Ms. Sato joined Driftwood Capital Management LLC at its inception in 2017, having previously served as Senior Portfolio Manager at Brindoval Global Investments Ltd. from 2010 to 2017, where she managed equity long/short portfolios in the financials and industrials sectors. Prior to Brindoval, Ms. Sato served as an analyst at Broadmark Capital Group LLC from 2005 to 2010, where she developed expertise in fundamental equity analysis and event-driven investing. Ms. Sato holds a Bachelor of Science in Economics from the University of Pennsylvania and a Master of Business Administration from Columbia Business School. She is a CFA charterholder.
Current Role at DCM: Ms. Sato oversees the equity long/short and event-driven strategy verticals of the Fund, which together represent approximately two-thirds of the Fund's gross exposure. She co-manages risk oversight alongside Mr. Whitmore (and has assumed primary responsibility for risk oversight since Mr. Whitmore's incapacitation). Ms. Sato has been integrally involved in all material investment decisions since the Fund's inception and has served as the day-to-day operational leader of the investment team in Mr. Whitmore's absence since June 3, 2024.
Capital Commitment to Fund: $14.35 million, representing approximately 0.5% of the Fund's assets under management. Ms. Sato's commitment was made through the General Partner vehicle.
B. Jonathan K. Huang — Proposed Successor Key Person (Joint)
Title: Head of Credit Strategies, Driftwood Capital Management LLC.
Experience: Mr. Huang has sixteen (16) years of experience in institutional investment management, with particular depth in credit markets, structured finance, and relative value strategies.
Career History: Mr. Huang joined Driftwood Capital Management LLC in 2019. Prior to joining DCM, Mr. Huang served as a Partner at Ashford Credit Partners LP from 2013 to 2019, where he was responsible for managing a $900 million credit-focused portfolio encompassing investment-grade and high-yield corporate bonds, structured credit products, and distressed debt. Before Ashford, Mr. Huang served as a Vice President at Meridian Structured Finance LLC from 2008 to 2013, where he specialized in structured credit analysis and relative value trading. Mr. Huang holds a Bachelor of Arts in Mathematics from the Massachusetts Institute of Technology and a Master of Science in Financial Engineering from the University of California, Berkeley.
Current Role at DCM: Mr. Huang manages the credit relative value portfolio, which represents approximately one-third of the Fund's gross exposure. He has been responsible for generating consistent risk-adjusted returns in the credit strategy vertical since joining DCM and has served as a member of DCM's internal investment committee (an informal body distinct from the Investment Committee proposed in the First Amendment) since 2020.
Capital Commitment to Fund: $8.61 million, representing approximately 0.3% of the Fund's assets under management.
C. Rationale for Joint Designation
The General Partner has proposed a joint Key Person designation for Ms. Sato and Mr. Huang, rather than designating a single individual, for the following reasons:
Strategy Coverage. Ms. Sato and Mr. Huang together provide comprehensive coverage of all three of the Fund's strategy verticals. Ms. Sato oversees the equity long/short and event-driven books, while Mr. Huang manages the credit relative value portfolio. No single individual at DCM possesses the depth of expertise required to oversee all three verticals. The joint designation ensures that each strategy vertical is covered by a designated Key Person with relevant subject matter expertise.
Combined Experience. Ms. Sato and Mr. Huang together bring thirty-five (35) years of institutional investment management experience to the Fund. Both have been integral members of the Fund's investment team since its early years — Ms. Sato since inception in 2017 and Mr. Huang since 2019 — and have worked closely with Mr. Whitmore in developing and executing the Fund's investment strategy.
Redundancy and Continuity. The joint designation provides structural redundancy that was absent under the prior single-Key Person framework. Under the proposed revised Key Person Event mechanics (discussed in Section VII.B below), the loss of one of the two Successor Key Persons would not automatically trigger an Investment Period suspension; rather, it would trigger a 180-day Replacement Period during which the General Partner would seek a replacement. Only the loss of both Successor Key Persons would trigger the traditional Key Person Event consequences. This two-tiered approach provides significantly enhanced stability and continuity for the Fund and its limited partners.
VII. Proposed First Amendment to the A&R LPA — Summary of Key Terms
The following is a summary of the key terms and provisions of the proposed First Amendment to the A&R LPA, as set forth in the draft circulated to all limited partners on July 15, 2024. A complete copy of the draft First Amendment is included as Attachment B to this memorandum. This summary is qualified in its entirety by reference to the full text of the draft First Amendment.
A. Redefinition of "Key Person" (Amended Section 8.04(a))
The First Amendment would amend Section 8.04(a) of the A&R LPA to redefine "Key Person" to mean Elaine R. Sato and Jonathan K. Huang, jointly. Under the current A&R LPA, the term "Key Person" is defined to mean Marcus J. Whitmore individually. The amended definition would replace Mr. Whitmore's designation with the joint designation of Ms. Sato and Mr. Huang, and would provide that both individuals must remain actively involved in the affairs of the Fund for the Key Person requirement to be deemed satisfied.
The redefinition is structured as a complete replacement of the existing definition rather than a supplement. Upon the effectiveness of the First Amendment, Mr. Whitmore would no longer be a designated Key Person and would have no governance authority in that capacity. His role as Senior Advisor is addressed in Section VII.E below.
B. Revised Key Person Event Mechanics (Amended Section 8.04(b)–(c))
The First Amendment introduces a two-tiered Key Person Event framework that distinguishes between the loss of one Successor Key Person and the loss of both Successor Key Persons:
Loss of One Successor Key Person. If either Ms. Sato or Mr. Huang (but not both) becomes unable to devote substantially all of his or her professional time to the affairs of the Fund for a period of seven consecutive calendar days (applying the same standard as in the existing Section 8.04(b)), a Replacement Period of one hundred eighty (180) calendar days would be triggered. During the Replacement Period:
(i) The Investment Period would not be automatically suspended. The remaining Successor Key Person, together with the Investment Committee, would continue to exercise investment discretion on behalf of the Fund.
(ii) The General Partner would be required to use commercially reasonable efforts to identify and propose a replacement Successor Key Person for approval by limited partners holding at least 66⅔% of aggregate LP capital commitments (excluding the GP co-investment).
(iii) If no replacement is approved within the 180-day Replacement Period, the situation would be treated as a full Key Person Event under the revised framework, triggering the consequences described below.
Loss of Both Successor Key Persons. If both Ms. Sato and Mr. Huang become unable to devote substantially all of their professional time to the affairs of the Fund (whether simultaneously or sequentially, including through the expiration of a Replacement Period without approval of a replacement), the traditional Key Person Event consequences would be triggered. These consequences mirror those currently set forth in Section 8.04(c), including: (a) immediate suspension of the Investment Period; (b) the follow-on investment cap (as revised — see Section VII.D below); (c) LP notification within five business days; (d) commencement of a ninety-calendar-day Cure Period; and (e) the right of majority-in-interest limited partners to elect an extension or an orderly wind-down upon expiration of the Cure Period.
This two-tiered approach represents a significant structural enhancement relative to the current single-person framework, which provides no intermediate mechanism between full operational capacity and complete Investment Period suspension. The IAC should consider whether the 180-day Replacement Period is appropriate in duration and whether additional safeguards should be incorporated during that period.
C. Investment Committee (New Section 8.05)
The First Amendment would add a new Section 8.05 to the A&R LPA, establishing a three-member Investment Committee (the "Investment Committee") with the following composition:
(a) Elaine R. Sato — Chair of the Investment Committee;
(b) Jonathan K. Huang — Member of the Investment Committee; and
(c) One independent member — to be designated by the Investor Advisory Committee.
The Investment Committee would have oversight authority over all new investments exceeding a threshold to be specified in the final text of the First Amendment. The draft currently contemplates that the Investment Committee must approve any new investment or commitment by the Fund in excess of the specified threshold, with the approval of at least two of the three members required for any such investment to proceed.
The creation of the Investment Committee and the IAC's authority to designate an independent member represent significant governance enhancements that are novel to the Fund's structure. The independent member would provide a check on General Partner discretion and would serve as a mechanism for enhanced alignment of interests between the General Partner and the limited partners. The independent member is intended to bring independent judgment, relevant industry experience, and fiduciary perspective to the Investment Committee's deliberations.
The IAC's role in designating the independent member is a critical action item for the meeting scheduled for July 29, 2024. The IAC should consider and discuss the following matters in connection with this designation:
(i) the qualifications and experience that should be required of the independent member;
(ii) the criteria for "independence" that should be applied (e.g., no current or prior affiliation with DCM, no financial interest in the General Partner, no business relationship with Mr. Whitmore, Ms. Sato, or Mr. Huang);
(iii) the term of service of the independent member and the IAC's right to remove and replace the independent member;
(iv) the compensation, if any, to be paid to the independent member and the source of such compensation (i.e., whether paid from Fund assets or by the General Partner);
(v) the fiduciary duties, if any, owed by the independent member to the limited partners; and
(vi) the process and timeline for identifying and appointing the initial independent member.
D. Reduced Follow-on Investment Cap
The First Amendment would reduce the follow-on investment cap applicable during any future Key Person Event from 1.0% of AUM to 0.5% of AUM. Based on the Fund's current AUM of approximately $2.87 billion, this would reduce the cap from $28.7 million to $14.35 million. This reduction reflects the General Partner's recognition that limited partners desire enhanced capital protection during periods of governance uncertainty and is intended to limit the General Partner's ability to deploy capital during any future Key Person Event while still preserving the flexibility to make essential follow-on investments in existing portfolio companies.
The IAC should note that the reduced cap would apply only to future Key Person Events occurring after the effectiveness of the First Amendment. The current follow-on investment cap of $28.7 million (1.0% of AUM) remains in effect during the pendency of the current Key Person Event and the Cure Period.
E. Marcus J. Whitmore — Senior Advisor Designation
Under the proposed First Amendment, Mr. Whitmore would be designated as "Senior Advisor" to the Fund. This designation is honorific and advisory in nature and does not carry any governance authority. Specifically:
(a) Mr. Whitmore would have no voting rights on any matter relating to the Fund's governance, operations, or investment decisions;
(b) Mr. Whitmore would have no membership on the Investment Committee and would not attend Investment Committee meetings as a matter of right;
(c) Mr. Whitmore would have no decision-making power over any investment or operational matter of the Fund or DCM;
(d) Mr. Whitmore would retain the right to participate in advisory consultations at the discretion of the Investment Committee, provided that such consultations do not confer upon Mr. Whitmore any authority to direct or influence investment decisions in a manner that would be inconsistent with the Key Person framework; and
(e) Mr. Whitmore's designation as Senior Advisor would not create an obligation on the part of the Fund or DCM to compensate Mr. Whitmore in his capacity as Senior Advisor, except as otherwise provided in the carried interest vesting schedule described in Section VII.G below.
The Senior Advisor designation is intended to preserve Mr. Whitmore's institutional relationship with the Fund in recognition of his foundational role, while ensuring that governance authority is clearly vested in the designated Successor Key Persons and the Investment Committee.
F. Carried Interest Reallocation (Amended Schedule A)
The First Amendment would amend Schedule A to the A&R LPA to revise the allocation of the General Partner's carried interest (incentive allocation) among the individuals entitled to share in such allocation. The General Partner's carried interest allocation of 20% of net new profits above the high-water mark, subject to the 6% annualized hurdle rate with full catch-up, would remain unchanged in the aggregate. The total economic interest of the General Partner in the Fund's profits is not being modified by the First Amendment.
However, the individual allocations within the General Partner would be revised to reflect the changed roles and responsibilities of the relevant individuals. The following table sets forth the pre-amendment and post-amendment carried interest allocations:
As reflected in the table:
(a) Mr. Whitmore's allocation would be reduced by fifty percent (50%), from 18% to 9% of the GP's 20% incentive allocation (i.e., from 3.6% to 1.8% of net new fund profits). This reduction reflects Mr. Whitmore's transition from the sole Key Person and active CIO to the non-operational Senior Advisor role.
(b) Ms. Sato's allocation would be increased from 1.5% to 7.0% of the GP's 20% incentive allocation (i.e., from 0.3% to 1.4% of net new fund profits). This increase reflects her expanded role as Investment Committee Chair, co-Key Person, and the de facto day-to-day leader of the Fund's investment operations.
(c) Mr. Huang's allocation would be increased from 0.5% to 4.0% of the GP's 20% incentive allocation (i.e., from 0.1% to 0.8% of net new fund profits). This increase reflects his designation as co-Key Person and his integral role in managing the credit relative value strategy vertical.
The carried interest reallocation is an internal matter of the General Partner and does not affect the aggregate economics borne by the limited partners. The total incentive allocation remains 20% of net new profits above the high-water mark, and the total carried interest is shared among the same three individuals in different proportions. The reallocation is set forth in the draft First Amendment for transparency and to ensure that the interests of the Successor Key Persons are appropriately aligned with those of the limited partners. The IAC may wish to consider whether the proposed allocations appropriately incentivize the Successor Key Persons and whether additional retention or alignment mechanisms should be considered.
G. Whitmore Carried Interest Vesting Schedule
The First Amendment would impose a modified vesting schedule on Mr. Whitmore's accrued but unvested carried interest. Under the current A&R LPA and the Operating Agreement of DCM, Mr. Whitmore's carried interest entitlement is 18% of the GP's 20% incentive allocation, equivalent to 3.6% of net new fund profits. A portion of this entitlement has vested based on prior performance periods, and a portion remains unvested.
Under the proposed modified vesting schedule:
(a) Fifty percent (50%) of Mr. Whitmore's accrued but unvested carried interest would vest immediately as of the date of the Key Person Event (June 10, 2024). This immediate vesting is intended to provide Mr. Whitmore with economic certainty in recognition of his contributions to the Fund and to avoid protracted disputes regarding unvested carry during his recovery period.
(b) The remaining fifty percent (50%) of Mr. Whitmore's accrued but unvested carried interest would vest ratably over thirty-six (36) months from June 10, 2024 (i.e., approximately 1.39% per month). The ratable vesting schedule extends through June 10, 2027, and would continue regardless of whether Mr. Whitmore is able to return to any professional capacity.
The modified vesting schedule is subject to customary forfeiture provisions in the event of Mr. Whitmore's material breach of the non-compete and non-solicitation covenants set forth in the Operating Agreement of DCM, as well as standard bad-acts carve-outs. The IAC should note that the vesting schedule applies to Mr. Whitmore's accrued but unvested carried interest; carried interest that has already vested and been paid to Mr. Whitmore is not subject to clawback under the proposed First Amendment.
H. Consent Threshold and Mechanics
The First Amendment requires the consent of limited partners holding at least 66⅔% of aggregate LP capital commitments, excluding the General Partner's co-investment, in accordance with Section 14.01 of the A&R LPA. The consent threshold is calculated as follows:
Total Fund AUM: $2,870 million (approximately)
Less: Whitmore co-investment through GP vehicle: ($57.4 million)
Less: Sato co-investment through GP vehicle: ($14.35 million)
Aggregate voting LP commitments: $2,798.25 million
Required consent threshold (66⅔%): $1,865.50 million
The consent is being solicited on a written consent basis, without a physical meeting of limited partners. Each limited partner will submit an individual LP Written Consent (a form of which is included as Attachment D to this memorandum) indicating its approval or disapproval of the First Amendment. Consents must be received by Calderwood & Harkness LLP on or before the LP Consent Deadline of August 23, 2024, to be counted toward the consent threshold.
The First Amendment is governed by the laws of the State of Delaware, consistent with the governing law provision of the A&R LPA. The consent solicitation has been structured to comply with all requirements of Section 14.01 of the A&R LPA and applicable provisions of the Delaware Revised Uniform Limited Partnership Act.
VIII. LP Consent Solicitation — Status and Timeline
The following table sets forth the key dates and events in connection with the Key Person Event and the LP consent solicitation:
If ≥ 66⅔% LP consent is obtained by August 23, 2024: The First Amendment would become effective promptly upon satisfaction of the consent condition. The anticipated effective date is within three (3) business days of the date on which the consent threshold is met. Upon effectiveness of the First Amendment, the Key Person Event would be deemed cured, the Investment Period suspension would be lifted, and the Fund would resume normal investment operations under the leadership of the Successor Key Persons and the Investment Committee.
If the consent threshold is not met by August 23, 2024: The General Partner would face a compressed timeline of approximately sixteen (16) days before the Cure Period expires on September 8, 2024. During this window, the General Partner could pursue one or more of the following courses of action:
(i) negotiate modifications to the Proposal in response to LP feedback and re-solicit consent on an expedited basis, although the practical feasibility of such a re-solicitation within a sixteen-day window is uncertain;
(ii) seek a majority-in-interest LP vote (i.e., consent of LPs holding more than 50% of aggregate LP capital commitments, excluding the GP co-invest) to extend the Cure Period by up to an additional ninety (90) calendar days, which would extend the Cure Period expiration to December 7, 2024; or
(iii) prepare for the possibility that majority-in-interest limited partners may elect to commence an orderly wind-down of the Fund in accordance with Article XII of the A&R LPA.
Early indications based on informal feedback received by the General Partner and by Calderwood & Harkness LLP suggest strong support among the LP base for the Successor Key Person Proposal and the draft First Amendment. However, formal consent tabulation has not yet commenced, and no assurances can be given that the 66⅔% threshold will be achieved by the LP Consent Deadline. Calderwood & Harkness LLP will conduct the formal consent tabulation process upon receipt of individual LP Written Consents.
IX. Role of the IAC in the Proposed Governance Framework
A. Independent Investment Committee Member Designation
As described in Section VII.C above, the proposed First Amendment would empower the IAC to designate one independent member to the three-member Investment Committee. This independent member would serve alongside Ms. Sato (as Chair) and Mr. Huang, and the Investment Committee would exercise oversight authority over all new investments exceeding the threshold specified in the First Amendment. The approval of at least two of the three members would be required for any such investment to proceed.
The IAC's authority to designate the independent member represents a novel and significant governance enhancement that has no precedent in the Fund's current operating framework. It reflects the General Partner's recognition that the transition from a single Key Person (Mr. Whitmore) to a joint Key Person structure warrants the introduction of independent oversight, and it provides the limited partner community — through the IAC — with a direct voice in the Fund's investment governance process.
The IAC should use the July 29, 2024 meeting as an opportunity to begin the process of identifying potential candidates for the independent member position. The IAC should also discuss and, if appropriate, establish criteria and procedures for the selection of the independent member, including qualifications, independence standards, term of service, compensation, and removal rights. These matters may be addressed either in the body of the First Amendment (if the IAC determines that additional provisions should be incorporated) or in a separate charter or terms of reference for the Investment Committee, to be adopted concurrently with the First Amendment.
B. IAC Consent as LP Voting Block
The five IAC members collectively hold $1,140 million of voting LP capital commitments, representing approximately 40.7% of the total voting LP commitments of $2,798.25 million. The required consent threshold for the First Amendment is $1,865.50 million (66⅔% of voting LP commitments).
If all five IAC members consent to the First Amendment, their combined commitments of $1,140 million would represent approximately 61.1% of the $1,865.50 million threshold. While IAC support alone would not satisfy the consent requirement, it would provide a substantial foundation upon which the broader LP consent solicitation could succeed. Conversely, if the IAC members do not support the First Amendment, achieving the 66⅔% threshold would require the consent of a significantly larger proportion of the remaining limited partner base, making the consent solicitation substantially more challenging.
It is important to note that each IAC member will submit its individual LP Written Consent separately. There is no block voting mechanism under the A&R LPA or under the proposed First Amendment; each limited partner — whether or not an IAC member — exercises its consent right independently. The IAC's deliberations at this meeting are advisory in nature and do not bind any individual IAC member with respect to its consent decision.
C. IAC Counsel Review
Wexford Crane & Albright LLP, specifically Helen M. Calloway, Partner, and David Pineda, Senior Associate, has been retained by the IAC to independently review the proposed First Amendment and to advise the IAC on the legal, governance, and economic implications of the Proposal. WCA has been provided with complete copies of all materials distributed to the limited partners, including the draft First Amendment, the Successor Key Person Proposal letter, the LP Notification letter, and all supporting documentation.
WCA is expected to provide its comments and recommendations to the IAC members separately, and the IAC may wish to schedule a separate session with WCA to discuss its findings in detail. Calderwood & Harkness LLP remains available to address any questions or comments raised by WCA on behalf of the IAC. However, the IAC and its members should be mindful that Calderwood & Harkness LLP serves as fund counsel to both DCM and the Fund and does not serve as independent counsel to the IAC. Any matters on which the IAC requires independent legal advice should be directed to WCA.
X. Delaware Law Considerations
The A&R LPA is governed by the laws of the State of Delaware, as specified in Section 15.08 thereof. The following is a summary of certain Delaware law considerations relevant to the proposed First Amendment and the LP consent solicitation. This summary is not exhaustive and is provided for informational purposes only.
Fiduciary Duties. Under the Delaware Revised Uniform Limited Partnership Act (6 Del. C. §§ 17-101 et seq.) (the "DRULPA"), the general partner of a Delaware limited partnership owes fiduciary duties to the limited partners, including the duty of loyalty and the duty of care, unless such duties are modified or eliminated by the partnership agreement. Section 11.02 of the A&R LPA modifies, but does not eliminate, the General Partner's fiduciary duties, providing that the General Partner's duty of care is limited to refraining from willful misconduct, gross negligence, or fraud, and that the General Partner's duty of loyalty is subject to specified safe harbors for conflicts of interest that are disclosed to and approved by the IAC. The General Partner has a fiduciary obligation to act in good faith in proposing Successor Key Persons and in the reallocation of carried interest. Calderwood & Harkness LLP has advised the General Partner to ensure that the Proposal and the carried interest reallocation are consistent with these fiduciary obligations, and the General Partner has confirmed its intention to comply with all applicable fiduciary duties in connection with the matters described in this memorandum.
LP Consent and Partnership Agreement Amendments. Under DRULPA § 17-302, a partnership agreement may provide for the manner in which it may be amended. Section 14.01 of the A&R LPA provides that the A&R LPA may be amended with the written consent of the General Partner and limited partners holding at least 66⅔% of aggregate LP capital commitments (excluding the GP co-investment), subject to certain protective provisions that require the consent of affected limited partners for amendments that would alter such limited partners' economic rights. The consent solicitation has been structured to comply with these provisions.
Statutory Compliance. The proposed First Amendment has been reviewed by Calderwood & Harkness LLP for compliance with all applicable provisions of the DRULPA, including those relating to fiduciary duties, indemnification, and partnership agreement amendments. The proposed amendment has been structured to ensure compliance with all contractual and statutory requirements. Following the effectiveness of the First Amendment, an updated Certificate of Limited Partnership will be filed with the Delaware Secretary of State, if and to the extent required by the DRULPA.
XI. Discussion Items for the IAC Meeting
The following items are proposed for discussion at the IAC meeting scheduled for July 29, 2024. The IAC Chair, Diana Cortland, will determine the order and allocation of time for each agenda item:
1. Successor Key Person Proposal. Review and discussion of the proposed designation of Elaine R. Sato and Jonathan K. Huang as joint Successor Key Persons, including their qualifications, experience, capital commitments, and the rationale for a joint designation.
2. Investment Committee Structure and Independent Member Designation. Review of the proposed three-member Investment Committee and the IAC's role in designating the independent member. Identification of potential candidates for the independent member position and discussion of the process and criteria for selection, including qualifications, independence requirements, term of service, compensation, and removal rights.
3. Carried Interest Reallocation and Whitmore Vesting Schedule. Review of the proposed reallocation of the General Partner's carried interest among Mr. Whitmore, Ms. Sato, and Mr. Huang, and discussion of the modified vesting schedule for Mr. Whitmore's accrued but unvested carried interest, including the immediate vesting of 50% and the 36-month ratable vesting of the remaining 50%.
4. Reduced Follow-on Investment Cap. Discussion of the proposed reduction of the follow-on investment cap during any future Key Person Event from $28.7 million (1.0% of AUM) to $14.35 million (0.5% of AUM), including the implications for portfolio management and capital protection.
5. 180-Day Replacement Period Mechanics. Discussion of the proposed two-tiered Key Person Event framework, including the 180-day Replacement Period applicable to the loss of a single Successor Key Person, and whether additional safeguards or conditions should be imposed during the Replacement Period.
6. Timeline and Urgency Considerations. Review of the critical deadlines, including the LP Consent Deadline of August 23, 2024 and the Cure Period expiration of September 8, 2024, and discussion of the consequences of failure to obtain the required 66⅔% LP consent within the applicable timeframe.