PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
CALDERWOOD & HARKNESS LLP 1585 Broadway, 34th Floor New York, NY 10036
Matter No.: 1024-00002
Date: June 28, 2024
TO:
Driftwood Capital Management LLC 680 Lexington Avenue, 31st Floor New York, NY 10022
Attention: Elaine R. Sato, Deputy Chief Investment Officer
FROM:
Graham Sutherland, Responsible Partner, Funds & Asset Management Stephen Adler, Lead Associate, Funds & Asset Management
RE:
Recommended Successor Governance Framework and Carried Interest Reallocation — Driftwood Absolute Return Fund Ltd.
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I. Executive Summary
This memorandum presents Calderwood & Harkness LLP's recommendations regarding a successor governance framework and carried interest reallocation for Driftwood Absolute Return Fund Ltd. ("DARF" or the "Fund"), a Cayman Islands exempted limited partnership (Cayman Registration No. ELP-87234) organized and operated pursuant to that certain Amended & Restated Limited Partnership Agreement, dated as of March 15, 2017 (the "A&R LPA"), which is governed by the laws of the State of Delaware. The recommendations set forth herein have been developed in close coordination with Driftwood Capital Management LLC ("DCM"), the Fund's general partner, and are designed to address the immediate governance challenges confronting the Fund while positioning it for long-term stability and continued strong performance.
Key Person Event. As detailed more fully in Section II.C below, a Key Person Event under Section 8.04(a) of the A&R LPA was triggered on June 10, 2024, due to the medical incapacitation of Marcus J. Whitmore, the Fund's Founder, Chief Investment Officer, and sole designated Key Person under the A&R LPA. Mr. Whitmore suffered a hemorrhagic stroke on June 3, 2024, and is currently undergoing intensive rehabilitation at Lenox Hill Medical Center in New York. His medical team projects a recovery period of twelve to eighteen months, with an uncertain return-to-work prognosis. As a consequence of the Key Person Event, the Fund's Investment Period is currently suspended, follow-on investments are capped at $28.7 million (representing 1% of assets under management), and a 90-calendar-day Cure Period commenced on June 10, 2024, expiring on September 8, 2024. LP notification of the Key Person Event was dispatched on June 14, 2024, within the five-business-day contractual deadline prescribed by Section 8.04(c) of the A&R LPA.
Fund Overview. As of May 31, 2024, the Fund reported net asset value ("NAV") of $2.87 billion, as calculated and reported by Pinnacle Fund Services (Cayman) Ltd., the Fund's independent administrator. The Fund has 47 limited partners and a five-member Investor Advisory Committee (the "IAC") established under Section 9.02 of the A&R LPA. The Fund's strong year-to-date performance — a net return of +5.4% through May 31, 2024 — underscores the importance of continuity and the avoidance of a disruptive wind-down scenario.
Summary of Recommendations. We recommend that DCM pursue the following six-part governance restructuring through a First Amendment to the A&R LPA (the "LPA Amendment"):
(i) Successor Key Person Designation. Designate Elaine R. Sato, the Fund's Deputy Chief Investment Officer and 10% Managing Member of DCM, and Jonathan K. Huang, Head of Credit Strategies at DCM, jointly as Successor Key Persons under a revised Section 8.04 of the A&R LPA.
(ii) Investment Committee. Create a three-member Investment Committee comprising Ms. Sato (as Chair), Mr. Huang, and one independent member to be designated by the IAC, to provide formalized governance over investment decisions exceeding a specified threshold.
(iii) Revised Key-Person Clause Mechanics. Revise Section 8.04 to implement a tiered trigger mechanism that distinguishes between the loss of one Successor Key Person (triggering a 180-day Replacement Period with IAC oversight) and the loss of both Successor Key Persons (triggering an immediate Key Person Event with enhanced investor protections).
(iv) Reduced Follow-On Investment Cap. Reduce the follow-on investment cap during a Key Person Event from $28.7 million (1% of AUM) to $14.35 million (0.5% of current AUM), providing enhanced protection against capital deployment risk during a governance vacuum.
(v) Carried Interest Reallocation. Reallocate carried interest within the GP to reflect the shift in investment authority, reducing Mr. Whitmore's allocation from 18% to 9% of the GP's 20% incentive allocation, increasing Ms. Sato's allocation from 1.5% to 7%, and increasing Mr. Huang's allocation from 0.5% to 4%, with no change to the total GP-level incentive allocation of 20%.
(vi) Senior Advisor Designation. Designate Mr. Whitmore as Senior Advisor to the Fund, with no governance authority but with a modified carry vesting schedule that recognizes his founder contributions while incentivizing continued advisory involvement.
Proposed Timeline. We recommend that a draft LPA Amendment be circulated to all 47 limited partners by mid-July 2024, accompanied by a Successor Proposal letter and a Form of Written Consent, with a 40-calendar-day consent solicitation period. This timeline targets amendment effectiveness in late August 2024 — well in advance of the September 8, 2024 Cure Period expiration. Approval of the LPA Amendment requires the affirmative written consent of limited partners holding at least 66⅔% of aggregate LP capital commitments (excluding the GP co-invest), which equates to approximately $1,865.50 million of the $2,798.25 million in voting LP commitments. Time is of the essence, and we urge DCM to proceed promptly with the recommended framework.
II. Background and Current Situation
A. The Fund and Its Governance Structure
Driftwood Absolute Return Fund Ltd. is a Cayman Islands exempted limited partnership registered under the Exempted Limited Partnership Act (as revised) of the Cayman Islands, bearing Cayman Registration No. ELP-87234. The Fund's registered agent in the Cayman Islands is Archipelago Corporate Services Ltd., P.O. Box 2681, George Town, Grand Cayman, KY1-1111. Notwithstanding its Cayman Islands domicile, the Fund's governing instrument — the A&R LPA, dated as of March 15, 2017 — is expressly governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflicts of law principles.
The Fund's general partner is Driftwood Capital Management LLC ("DCM"), a limited liability company organized under the laws of the State of Delaware, with its principal office located at 680 Lexington Avenue, 31st Floor, New York, NY 10022. DCM's registered agent in Delaware is Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, Delaware 19801 (EIN: 82-4917653). DCM has two Managing Members: Marcus J. Whitmore, who holds a 90% managing member interest, and Elaine R. Sato, who holds a 10% managing member interest. Under the current governance framework, as reflected in both DCM's operating agreement and the A&R LPA, Mr. Whitmore has served as the Fund's sole Chief Investment Officer and sole designated Key Person, exercising plenary authority over all investment decisions and fund-level governance matters within the scope of the GP's powers.
The Fund's investment strategy is multi-strategy absolute return, encompassing three primary strategy verticals: (i) equity long/short, (ii) event-driven, and (iii) credit relative value, with a particular sector focus on companies in the asset management and banking industries. The Fund was established at inception on March 15, 2017, and has operated continuously since that date.
The Fund engages several third-party service providers in connection with its operations:
• Fund Administrator: Pinnacle Fund Services (Cayman) Ltd. ("Pinnacle"), which serves as the Fund's independent administrator and is responsible for NAV calculation, investor services, and anti-money laundering compliance.
• Auditor: Graystone & Whitfield LLP ("G&W"), which provides annual audit services and tax reporting support.
• Prime Broker: Halcyon Securities International Ltd. ("Halcyon"), which provides prime brokerage services, including custody, securities lending, and financing.
The Fund currently has 47 limited partners, ranging from large public pension systems and sovereign wealth advisory vehicles to endowments, funds of funds, and family offices. A five-member Investor Advisory Committee was established under Section 9.02 of the A&R LPA at the time of the Fund's formation and has been an active governance body since that time, meeting at least quarterly and providing guidance on matters including conflict of interest waivers, valuation methodology questions, and side letter negotiations. The composition and commitments of the IAC members are discussed in detail in Section IX below.
B. Fund Financial Overview (as of May 31, 2024)
As of May 31, 2024, the Fund reported the following financial metrics, as calculated and reported by Pinnacle Fund Services:
The Fund's year-to-date net return of +5.4% reflects strong performance across all three strategy verticals, with the equity long/short book contributing approximately 2.8% of net returns, the event-driven book contributing approximately 1.5%, and the credit relative value book contributing approximately 1.1%. The current NAV per unit of $150.53 is meaningfully above the high-water mark of $142.67, indicating that the Fund is well positioned to generate incentive allocation income for the GP in the current fiscal year. This strong performance trajectory underscores the significant economic interest that both the GP and the limited partners have in ensuring continuity of investment management and avoiding the potential disruptions associated with an orderly wind-down.
The Fund's gross leverage of 1.85× and net exposure of 0.60× are consistent with its historical operating range and reflect a moderately levered multi-strategy portfolio. The current portfolio includes approximately 187 active positions across the three strategy verticals, with a weighted average position size of approximately $15.3 million.
C. The Key Person Event
The A&R LPA contains a key-person provision in Section 8.04 that is central to the current governance crisis. The relevant provisions operate as follows:
Section 8.04(a) — Definition. Section 8.04(a) defines the "Key Person" as Marcus J. Whitmore, solely. No other individual is named as a Key Person or a backup Key Person, nor does the provision contemplate any automatic succession mechanism.
Section 8.04(b) — Trigger. Section 8.04(b) provides that a "Key Person Event" is triggered when the Key Person "is unable to devote substantially all of his professional time and attention to the affairs of the Fund and the General Partner for a period of seven (7) or more consecutive calendar days." The trigger is objective and does not require a formal determination by a physician or other third party; the passage of seven consecutive calendar days of incapacity is sufficient.
Factual Circumstances. Mr. Whitmore suffered a hemorrhagic stroke on the evening of June 3, 2024, and was admitted to Lenox Hill Medical Center in New York, where he has remained continuously since that date. His medical team — led by Dr. Priya Ranganathan (Chief of Neurology, Lenox Hill) — has communicated to Mr. Whitmore's family and to DCM that Mr. Whitmore's recovery is projected to require a period of twelve to eighteen months of intensive rehabilitation, with an uncertain prognosis regarding his eventual ability to return to full-time professional activity. Mr. Whitmore has been unable to communicate regarding investment matters or fund governance since his admission, and there is no reasonable prospect that he will be able to resume his duties in the near term.
Key Person Event Triggered. The Key Person Event was deemed triggered on June 10, 2024, which is seven consecutive calendar days following the onset of Mr. Whitmore's incapacity on June 3, 2024.
Section 8.04(c) — Consequences. Upon the triggering of a Key Person Event, Section 8.04(c) of the A&R LPA prescribes the following consequences, all of which are currently in effect:
(i) Immediate Suspension of the Investment Period. The GP may not make any new portfolio investments on behalf of the Fund for the duration of the Key Person Event.
(ii) Follow-On Investment Cap. Follow-on investments in existing portfolio positions are capped at $28.7 million, representing 1% of the Fund's AUM as of the date of the Key Person Event. This cap is designed to permit prudent portfolio management (e.g., averaging into existing positions, meeting margin calls) while preventing significant new capital deployment during a period of governance uncertainty.
(iii) LP Notification. The GP is required to notify all limited partners of the Key Person Event within five (5) business days of its occurrence. LP notification was dispatched by email and overnight courier on June 14, 2024, which was within the five-business-day contractual deadline of June 17, 2024.
(iv) Cure Period. A 90-calendar-day Cure Period commences on the date of the Key Person Event. The Cure Period commenced on June 10, 2024, and expires on September 8, 2024.
(v) Successor Key Person Proposal. During the Cure Period, the GP may propose one or more Successor Key Persons for approval by the limited partners. Approval of a Successor Key Person requires the affirmative written consent of limited partners holding at least 66⅔% of aggregate LP capital commitments (excluding the GP's co-investment commitment).
(vi) Failure to Cure. If no Successor Key Person is approved within the Cure Period, limited partners holding a majority-in-interest of aggregate LP capital commitments may elect to either (a) extend the Cure Period by up to 90 additional calendar days, or (b) commence an orderly wind-down of the Fund's portfolio.
The consequences outlined above create a sense of urgency that pervades this entire memorandum. The suspension of the Investment Period, in particular, constrains the Fund's ability to capitalize on investment opportunities and may result in suboptimal portfolio management during the Cure Period. The risk of an orderly wind-down — which could involve the liquidation of approximately $2.87 billion in assets across potentially illiquid credit and event-driven positions — is a worst-case scenario that would likely result in significant value destruction for all stakeholders, including the limited partners.
D. Voting Mechanics
The consent mechanics applicable to both the Successor Key Person approval under Section 8.04(c) and the LPA Amendment under Section 14.01 require careful attention to the calculation of the voting threshold. The A&R LPA provides that the GP's co-investment commitment is excluded from the voting base for purposes of calculating LP consent thresholds. The relevant calculations are as follows:
• Total Fund AUM (approximate, as of May 31, 2024): $2,870,000,000
• Less: Whitmore co-investment commitment (through GP entity): ($57,400,000)
• Less: Sato co-investment commitment (as Managing Member of GP entity): ($14,350,000)
• Aggregate LP Capital Commitments for Voting Purposes: $2,798,250,000
We note that Mr. Huang's commitment of $8.61 million is also made through the GP vehicle, and depending on the interpretation of the "GP co-invest" exclusion in the A&R LPA, this amount may also be excluded from the voting base. For purposes of this memorandum, we have conservatively excluded only the Whitmore and Sato commitments, as they are the named Managing Members of DCM. This interpretive question should be addressed in the LPA Amendment for clarity going forward.
The 66⅔% consent threshold applicable to both the Successor Key Person approval and the LPA Amendment is calculated as follows:
$2,798,250,000 × 66.667% = $1,865,500,000 (approximate)
The five IAC members collectively represent $1,140,000,000 in capital commitments, broken down as follows: Northvale Public Employees' Retirement System ($310 million), Sycamore Endowment Partners LP ($275 million), Velthorn Institutional Fund of Funds III, L.P. ($220 million), Bridlewood Family Office Holdings Ltd. ($185 million), and Atlas Sovereign Wealth Advisory LLC ($150 million). This aggregate of $1,140 million represents approximately 40.7% of the $2,798.25 million in voting LP commitments. IAC support is therefore critical to achieving the consent threshold, but it is insufficient on its own — an additional approximately $725.5 million in LP consents (representing approximately 25.9% of voting LP commitments) would be needed from the remaining 42 non-IAC limited partners. This dynamic will shape the consent solicitation strategy discussed in Section X below.
III. Recommended Successor Key Person Designations
A. Overview of Recommendation
We recommend that DCM designate Elaine R. Sato and Jonathan K. Huang jointly as Successor Key Persons under a revised Section 8.04 of the A&R LPA. The joint designation is a deliberate structural choice that reflects the reality that no single individual within DCM — or, in our assessment, available externally within the relevant timeframe — can fully replicate Mr. Whitmore's singular combination of investment judgment, strategic breadth, and institutional authority across all three of the Fund's strategy verticals. By designating Ms. Sato and Mr. Huang jointly, DCM ensures complementary coverage: Ms. Sato brings deep expertise in equity long/short and event-driven investing, while Mr. Huang provides specialized leadership in credit relative value. Together, they span the entirety of the Fund's investment mandate.
Both Ms. Sato and Mr. Huang have been integral to the Fund's investment process for the duration of their respective tenures at DCM. Each is well known to the LP base and to the IAC through their participation in quarterly investor calls, annual investor meetings, and ad hoc LP interactions. Their designation as Successor Key Persons should therefore not come as a surprise to the investor base and may, in fact, be perceived as the natural and expected succession plan.
B. Elaine R. Sato — Qualifications and Suitability
Ms. Sato currently serves as the Deputy Chief Investment Officer of DCM and holds a 10% Managing Member interest in the general partner entity. She brings nineteen years of experience in multi-strategy investing, having built her career through progressively responsible positions at two well-regarded investment management firms prior to co-founding Driftwood alongside Mr. Whitmore in 2017.
Ms. Sato began her career in 2005 as an Analyst at Broadmark Capital Group LLC, a New York-based multi-strategy hedge fund, where she spent five years developing fundamental equity research capabilities and event-driven investment theses. In 2010, she joined Brindoval Global Investments Ltd. as a Senior Portfolio Manager, where she managed a $600 million equity long/short book and co-led the firm's event-driven strategy. During her seven-year tenure at Brindoval, Ms. Sato developed the investment framework and risk management approach that she subsequently brought to Driftwood upon its formation.
Ms. Sato joined Driftwood at inception in March 2017, serving as the Fund's second-most-senior investment professional from day one. In her current role, she oversees the equity long/short and event-driven books, which together represent approximately 70% of the Fund's gross exposure, and co-manages the Fund's risk oversight framework alongside Mr. Whitmore. She has been instrumental in the Fund's performance, and her involvement in the investment process has been continuous and uninterrupted since the Fund's formation.
Ms. Sato's capital commitment to the Fund of $14.35 million — representing approximately 0.5% of the Fund's AUM — demonstrates meaningful alignment of interest with the limited partners. Her existing Managing Member status at DCM provides continuity in the GP's internal governance and eliminates the need for any restructuring of the GP entity in connection with the LPA Amendment (subject to the internal DCM operating agreement amendment discussed in Section VI.B below). Ms. Sato is well known to the LP base and to the IAC members from her regular participation in investor meetings, quarterly reporting calls, and individual LP interactions, and we believe she will be received favorably as a Successor Key Person.
C. Jonathan K. Huang — Qualifications and Suitability
Mr. Huang currently serves as Head of Credit Strategies at DCM, where he leads the Fund's credit relative value portfolio. He brings sixteen years of experience in credit markets, with particular expertise in structured credit, distressed debt, and relative value trading across investment-grade and high-yield credit instruments.
Mr. Huang's career trajectory includes a five-year tenure as a Vice President at Meridian Structured Finance LLC (2008–2013), where he specialized in structured credit analysis and trading during the post-financial-crisis period, gaining deep experience in distressed credit markets and restructuring situations. In 2013, he joined Ashford Credit Partners LP as a Partner, where he managed a $1.2 billion credit relative value strategy. Mr. Huang joined Driftwood in 2019, bringing his credit expertise to complement the Fund's existing equity and event-driven capabilities. Since joining, he has been responsible for building and managing the credit relative value portfolio, which represents approximately 30% of the Fund's gross exposure and has been a consistent contributor to Fund performance.
Mr. Huang's capital commitment to the Fund of $8.61 million — representing approximately 0.3% of the Fund's AUM — further demonstrates his alignment of economic interest with the limited partners. While his tenure at Driftwood (approximately five years) is shorter than Ms. Sato's (seven years since inception), his institutional knowledge and LP familiarity are substantial, and his expertise in credit relative value fills a critical gap that Ms. Sato's primary focus on equity long/short and event-driven strategies does not cover. Mr. Huang has participated in investor meetings and LP communications throughout his tenure and is known to the IAC and broader LP base as the Fund's senior credit professional.
D. Rationale for Joint Designation
The decision to recommend a joint — rather than sole — Key Person designation is grounded in both pragmatic and structural considerations. Mr. Whitmore's 28-year investment track record, spanning all three strategy verticals, and his stature as the Fund's founder and original investment visionary, cannot be fully replicated by any single individual. A sole successor designation of either Ms. Sato or Mr. Huang would leave a significant coverage gap in one or more of the Fund's strategy verticals, potentially undermining LP confidence and creating operational risk.
The joint designation of Ms. Sato and Mr. Huang provides the following advantages:
• Complementary Strategy Coverage. Ms. Sato's expertise in equity long/short and event-driven investing, combined with Mr. Huang's leadership of the credit relative value portfolio, ensures that all three strategy verticals are overseen by a designated Key Person with deep domain expertise.
• Combined Skin-in-the-Game. The combined capital commitment of Ms. Sato ($14.35 million) and Mr. Huang ($8.61 million) totals $22.96 million, which, while less than Mr. Whitmore's individual commitment of $57.4 million, nonetheless represents a meaningful economic alignment with the limited partners.
• Institutional Trend Alignment. Market practice among large multi-strategy hedge funds has increasingly shifted toward joint or team-based key-person designations, reflecting a recognition that dependence on a single individual — however talented — creates unacceptable concentration risk. The joint designation aligns with institutional investor expectations and may be viewed favorably by LP constituencies, particularly large public pension systems and sovereign wealth vehicles that have adopted governance standards favoring team-based investment oversight.
• Risk Mitigation. A joint designation, when coupled with the tiered trigger mechanism described in Section IV below, provides a more resilient governance structure by ensuring that the loss of a single key person does not automatically trigger a full Investment Period suspension and the attendant disruption to portfolio management.
For these reasons, we believe the joint designation of Ms. Sato and Mr. Huang is the optimal successor governance structure and represents the strongest possible proposal for LP approval.
IV. Proposed Revised Key-Person Clause Mechanics
A. Revised Section 8.04(a) — Redefinition of Key Person
We recommend that Section 8.04(a) of the A&R LPA be amended to redefine "Key Person" to mean Elaine R. Sato and Jonathan K. Huang, jointly. The revised definition should provide that the Fund's Key Person requirement is satisfied so long as both Ms. Sato and Mr. Huang are actively devoting substantially all of their professional time and attention to the affairs of the Fund and the General Partner. This joint formulation ensures that no Key Person Event occurs unless there is a departure, incapacitation, or other loss of active involvement by one or both of the designated Successor Key Persons, subject to the tiered trigger mechanism described below.
B. Revised Section 8.04(b) — Tiered Trigger Mechanism
The current A&R LPA employs a binary trigger: the sole Key Person either is or is not devoting substantially all professional time to the Fund, and if the Key Person fails to do so for seven consecutive calendar days, a Key Person Event occurs with all attendant consequences. This binary approach, while appropriate for a sole key-person structure, is ill-suited to a joint designation and would create excessive fragility in the successor governance framework. We therefore recommend that the revised Section 8.04(b) implement a tiered trigger mechanism that distinguishes between two scenarios:
Tier One — Loss of One Successor Key Person. If one (but not both) Successor Key Person ceases to devote substantially all of his or her professional time and attention to the affairs of the Fund and the General Partner for a period of thirty (30) consecutive calendar days, or if one Successor Key Person departs, dies, or becomes permanently disabled (as determined by a licensed physician), a "Replacement Period" of one hundred eighty (180) calendar days is triggered. During the Replacement Period:
(i) The Investment Period is not automatically suspended. The remaining Successor Key Person continues to exercise investment authority on behalf of the Fund and is authorized to make new and follow-on investments within the Fund's existing investment mandate, subject to Investment Committee oversight as described in Section V below.
(ii) The GP may propose a replacement Successor Key Person for approval by the IAC. Unlike the current provision, which requires full LP consent at the 66⅔% threshold, the replacement during a Tier One event requires only IAC approval by majority vote of the five IAC members. This streamlined approval mechanism reflects the lower severity of a Tier One event and avoids the delay and disruption of a full LP consent solicitation during what may be a temporary or manageable governance gap.
(iii) If no replacement Successor Key Person is appointed by the IAC within the 180-day Replacement Period, the Tier One event is escalated to a full Key Person Event under revised Section 8.04(c), with all attendant consequences (including Investment Period suspension and the follow-on investment cap).
The choice of a 30-day threshold (as opposed to the current 7-day threshold) for triggering a Tier One event is deliberate. A 7-day threshold is excessively sensitive for a joint key-person structure and would be triggered by routine absences such as illness, vacation, or travel. A 30-day threshold provides a reasonable buffer that accommodates short-term absences without triggering formal governance consequences, while still providing a meaningful and timely trigger if one Successor Key Person becomes unavailable for an extended period. Similarly, the 180-day Replacement Period is designed to provide the GP with adequate time to identify, evaluate, and onboard a replacement — a process that, in our experience, typically requires three to six months for senior investment professionals at funds of this scale and complexity.
Tier Two — Loss of Both Successor Key Persons. If both Successor Key Persons simultaneously or sequentially cease to devote substantially all of their professional time and attention to the affairs of the Fund and the General Partner (within the meaning of the clause), a full Key Person Event occurs immediately, without any interim Replacement Period. This reflects the severity of a scenario in which both designated leaders of the investment program are unavailable and the Fund lacks any designated Key Person oversight. The consequences of a Tier Two Key Person Event are set forth in revised Section 8.04(c) below.
C. Revised Section 8.04(c) — Consequences upon Full Key Person Event
We recommend that the consequences upon a full Key Person Event (whether triggered by the loss of both Successor Key Persons under Tier Two, or by the expiration of an unresolved Replacement Period under Tier One) remain substantially the same as those set forth in the current A&R LPA, with one important modification:
(i) Investment Period Suspension. The Investment Period is immediately suspended, and the GP may not make any new portfolio investments on behalf of the Fund.
(ii) Follow-On Investment Cap — Reduced. Follow-on investments are capped at $14.35 million (representing 0.5% of the Fund's current AUM), reduced from the current cap of $28.7 million (1% of AUM). This reduction reflects a more conservative posture that is appropriate given the greater severity of a governance crisis involving the loss of both successor key persons. The reduced cap of $14.35 million is calibrated to approximately equal the Fund's quarterly management fee amount, providing a practical benchmark that limits capital deployment risk during a governance vacuum while still permitting essential portfolio maintenance activities (e.g., margin call management, defensive hedging adjustments).
(iii) LP Notification. The GP must notify all limited partners within five (5) business days of the occurrence of the Key Person Event, consistent with the current provision.
(iv) Cure Period. A 90-calendar-day Cure Period commences on the date of the Key Person Event, during which the GP may propose additional Successor Key Persons for LP approval at the 66⅔% threshold. If no Successor Key Person is approved within the Cure Period, limited partners holding a majority-in-interest may elect to extend the Cure Period by up to 90 additional days or to commence an orderly wind-down.
D. Comparison to Market Practice
The proposed revisions to the key-person clause are consistent with, and in certain respects more investor-protective than, current market norms observed in large multi-strategy hedge funds. Based on our review of comparable fund documentation and industry surveys conducted by the Institutional Limited Partners Association (ILPA) and the Alternative Investment Management Association (AIMA), we note the following:
• Team-Based Key Person Definitions. A growing number of institutional-quality hedge funds with AUM in excess of $1 billion now employ team-based or joint key-person definitions, moving away from the single-individual model that prevailed in earlier fund vintages. This trend reflects LP concern about key-person concentration risk and a recognition that modern multi-strategy platforms depend on teams rather than individuals.
• Tiered Triggers. The tiered trigger mechanism — with a less severe consequence for the loss of one key person and a more severe consequence for the loss of both — is increasingly common in funds with joint key-person designations, and is generally well received by institutional LPs.
• Replacement Period Duration. A 180-day Replacement Period upon loss of one key person is consistent with LP expectations for funds of this scale. Some fund agreements provide for shorter periods (120 days), while others extend to 270 days; 180 days represents a reasonable middle ground.
• Follow-On Cap. The reduced follow-on cap of 0.5% of AUM is slightly more conservative than the market median, which typically ranges from 0.75% to 1.0% of AUM. This more conservative posture may be viewed favorably by institutional LPs, particularly those with fiduciary obligations, as it provides enhanced protection against capital deployment risk during a governance vacuum.
V. Proposed Investment Committee Structure
A. Establishment of Investment Committee (New Section 8.05)
We recommend the establishment of a formal Investment Committee through the insertion of a new Section 8.05 in the A&R LPA. The current governance framework, which vests sole investment authority in the Key Person acting through the GP, does not contemplate any committee-based oversight of investment decisions. While this centralized model has functioned effectively under Mr. Whitmore's leadership, the transition to a successor governance framework presents an opportunity — and, we believe, a necessity — to implement more institutionalized decision-making processes that reflect the Fund's scale and complexity.
The proposed Investment Committee would consist of three members:
(i) Elaine R. Sato (Chair), in her capacity as Successor Key Person and Deputy Chief Investment Officer;
(ii) Jonathan K. Huang, in his capacity as Successor Key Person and Head of Credit Strategies; and
(iii) One independent member, to be designated by the IAC pursuant to Section 9.02 of the A&R LPA, as further described in Section V.C below.
This three-member structure provides a balance between operational efficiency (a small, decisive committee) and governance integrity (the inclusion of an independent member with no economic ties to DCM). The Investment Committee represents a meaningful governance enhancement that addresses the institutional expectations of the Fund's LP base — many of whom are public pension systems, endowments, and sovereign wealth vehicles with formal governance requirements for their underlying fund investments.
B. Authority and Decision-Making
The Investment Committee's authority should be carefully delineated to ensure both robust governance oversight and efficient portfolio management. We recommend the following allocation of authority:
Committee-Level Decisions. All new portfolio investments exceeding a specified threshold — which we recommend be set at $25 million or greater — would require the affirmative vote of a majority of the Investment Committee (i.e., at least two of three members). This threshold is designed to capture the Fund's most consequential investment decisions while avoiding the imposition of committee oversight on routine portfolio management activities. The precise threshold is subject to negotiation with the IAC and broader LP base, and DCM should be prepared for the possibility that LPs may seek a lower threshold (e.g., $15 million or $20 million) to expand the scope of committee oversight.
Individual-Level Decisions. Follow-on investments in existing portfolio positions, portfolio management decisions, and other investment activities below the $25 million threshold may be made by the Chair or any Investment Committee member acting individually, without the need for formal committee approval. This delegation ensures that day-to-day portfolio management — including time-sensitive trading decisions — is not impeded by committee process requirements.
Operational Authority. Risk management, hedging, portfolio rebalancing, and other operational portfolio management activities remain within the authority of Ms. Sato and Mr. Huang in their respective operational capacities as Deputy CIO and Head of Credit Strategies. These activities are distinguished from new investment decisions and are not subject to Investment Committee oversight.
Scope Limitation. The Investment Committee's authority is limited to investment decisions within its defined scope. Fund-level governance matters — including amendments to the A&R LPA, decisions regarding fund wind-down, admission of new limited partners, and other matters governed by the existing provisions of the A&R LPA — remain subject to the applicable consent and voting provisions of the partnership agreement and are not within the Investment Committee's purview.
C. IAC-Designated Independent Member
The inclusion of an IAC-designated independent member on the Investment Committee is a central feature of the proposed governance framework and is expected to be a significant factor in securing LP support for the LPA Amendment. The independent member serves as a governance bridge between the GP and the LP base, providing a measure of investor oversight over investment decisions without converting the IAC into a shadow investment manager.
We recommend that the independent member be subject to the following eligibility criteria:
• The independent member must have at least fifteen (15) years of relevant investment management experience, with particular expertise in one or more of the Fund's three strategy verticals (equity long/short, event-driven, credit relative value).
• The independent member must be independent of DCM and its affiliates, including Mr. Whitmore, Ms. Sato, and Mr. Huang. "Independence" should be defined to exclude any individual who (a) has been an employee, officer, partner, or member of DCM or any affiliate within the preceding three years, (b) has a material financial relationship with DCM or any affiliate (other than compensation received for service on the Investment Committee), or (c) has a family relationship (within the third degree of consanguinity or affinity) with any Managing Member of DCM.
• The independent member is selected by the IAC by majority vote of the IAC members (i.e., at least three of five IAC members must approve the selection).
• The independent member serves an initial term of two (2) years, which is renewable by IAC vote at the conclusion of each term. The IAC may remove the independent member at any time by majority vote, with or without cause, and designate a replacement.
• Compensation for the independent member (if any) shall be borne by the Fund as an organizational expense and shall be disclosed to the limited partners in the Fund's annual financial statements.
This provision gives the LP base — through its elected IAC representatives — a meaningful governance role in the Fund's investment process, without granting the IAC or any individual LP direct control over investment decisions. The independent member's role is that of a check and balance on the Investment Committee, providing an outside perspective and ensuring that major investment decisions receive scrutiny from a qualified professional who is not employed by or economically dependent upon DCM.
D. Rationale
The establishment of the Investment Committee serves multiple purposes within the proposed governance framework:
First, it provides institutional governance checks that did not exist under the sole key-person model. Mr. Whitmore exercised plenary investment authority as the Fund's sole Key Person and CIO, with no formal committee oversight. While this centralized model was effective during Mr. Whitmore's tenure, it is less appropriate for a successor governance structure in which investment authority is shared between two individuals who, notwithstanding their considerable qualifications, do not individually possess Mr. Whitmore's breadth of experience and institutional stature.
Second, the IAC-designated independent member gives the investor base a direct governance role that goes beyond the advisory and consultative functions traditionally performed by the IAC. This enhanced governance input is expected to increase LP confidence in the successor governance framework and may be a decisive factor in securing the 66⅔% consent threshold.
Third, the Investment Committee structure aligns with the institutional expectations of the Fund's LP base, many of whom are fiduciaries subject to their own governance standards. For a fund of this AUM scale ($2.87 billion), the absence of any formal investment committee has been an unusual feature of the A&R LPA, and its establishment may be viewed as an overdue governance enhancement — one that, while prompted by the current Key Person Event, would have been advisable in any event.
Finally, and most practically, the Investment Committee structure may be viewed favorably by the five IAC members whose combined $1,140 million commitment is critical to achieving the 66⅔% consent threshold. The IAC members' ability to designate the independent member gives them a tangible governance benefit that did not exist under the prior framework, and this benefit may provide the additional incentive needed to secure their affirmative consents.
VI. Marcus J. Whitmore — Senior Advisor Designation
A. Senior Advisor Role
We recommend that Mr. Whitmore be designated as "Senior Advisor" to the Fund in connection with the LPA Amendment. The Senior Advisor designation serves a dual purpose: it preserves Mr. Whitmore's relationship with the Fund without creating any ambiguity regarding investment authority, and it provides a framework for Mr. Whitmore's continued association with the Fund in a non-governance capacity.
The Senior Advisor role should be defined with precision to avoid any implication that Mr. Whitmore retains decision-making authority. Specifically:
• The Senior Advisor has no governance authority whatsoever. He has no voting rights on the Investment Committee, no right to direct or veto any investment decision, no authority to bind the GP or the Fund, and no right to attend or participate in Investment Committee meetings except at the express invitation of the Chair.
• The Senior Advisor may provide non-binding advice and consultation to the Successor Key Persons and the Investment Committee at the discretion of the Successor Key Persons. Such advice is purely advisory and carries no decisional weight.
• The Senior Advisor has no authority to communicate with limited partners, counterparties, service providers, or any third party on behalf of the Fund or the GP, except as expressly authorized by the Successor Key Persons.
The designation of Mr. Whitmore as Senior Advisor — rather than simply removing him from all Fund-related roles — is an important element of the overall governance transition. For investor relations purposes, LPs may take comfort in the knowledge that Mr. Whitmore remains associated with the Fund and that, should his health improve, he may be available to provide guidance and institutional knowledge to the Successor Key Persons. The Senior Advisor designation also provides a more dignified and respectful transition for Mr. Whitmore, recognizing his foundational contributions to the Fund without perpetuating any governance authority that is no longer appropriate given his medical condition.
B. No Impact on GP Managing Member Structure
It is important to note that the LPA Amendment does not alter Mr. Whitmore's ownership interest in DCM. Mr. Whitmore remains a 90% Managing Member of DCM, and this ownership interest — which entitles him to a corresponding share of the GP's economics, including management fee income and carried interest — is a separate matter from the Key Person designation under the A&R LPA. The LPA Amendment addresses the Key Person provisions of the partnership agreement, not the internal governance or ownership structure of the GP entity.
However, the disconnect between Mr. Whitmore's 90% ownership interest in DCM and his removal from the Key Person role creates a potential governance inconsistency that must be addressed. Under DCM's current operating agreement, Mr. Whitmore's 90% Managing Member interest confers upon him significant governance authority within the GP entity, including the right to approve major decisions and to direct the GP's exercise of its powers under the A&R LPA. If left unaddressed, this internal DCM authority could theoretically conflict with the revised Key Person provisions, which vest investment authority in the Successor Key Persons.
We therefore recommend that DCM's operating agreement be amended in parallel with the LPA Amendment — as an internal GP governance matter, separate from the LP-facing amendment — to confirm that Ms. Sato has sole authority over Fund investment decisions and LP-facing governance in her capacity as Deputy CIO and Successor Key Person. This internal amendment should provide that, for so long as Mr. Whitmore is unable to perform his duties as CIO, Ms. Sato shall have exclusive authority to exercise all powers of DCM in its capacity as General Partner of the Fund, including the power to make investment decisions, communicate with limited partners, and execute documents on behalf of the GP. The internal amendment should further provide that Mr. Whitmore's Managing Member interest in DCM shall not be construed to confer any authority to direct, interfere with, or override the investment decisions of the Successor Key Persons or the Investment Committee.
This parallel amendment is an important internal DCM governance matter that is essential to ensuring consistency between the LP-facing LPA Amendment and DCM's internal governance. We recommend that DCM engage separate counsel, if it has not already done so, to advise on the internal operating agreement amendment and any related corporate governance matters at the GP level.
VII. Carried Interest Reallocation
A. Current Allocations
Under the current framework, the Fund's incentive allocation structure provides for a GP-level incentive allocation of 20% of net new profits above the high-water mark ($142.67 per unit, set December 31, 2023), subject to a 6% annualized hurdle rate with full catch-up. This 20% incentive allocation is allocated among the GP's principals in accordance with the internal allocation percentages set forth in Schedule A to the A&R LPA and DCM's operating agreement, as follows:
The current allocation reflects the historical reality that Mr. Whitmore, as the Fund's Founder and sole CIO, bore primary responsibility for investment decisions and performance across all strategy verticals. Ms. Sato's allocation of 1.5% of the GP's 20%, while meaningful in absolute dollar terms, is disproportionately small relative to her contribution to the investment process, and Mr. Huang's allocation of 0.5% is similarly modest given his role as Head of Credit Strategies. This skewed allocation structure was appropriate when Mr. Whitmore was the sole Key Person and principal investment decision-maker, but it is no longer sustainable or defensible in a framework where Ms. Sato and Mr. Huang will assume primary responsibility for all investment decisions.
B. Proposed Revised Allocations
We recommend the following revised internal allocations, to take effect upon the effectiveness of the LPA Amendment:
The key features of the reallocation are as follows:
(i) Whitmore Reduction. Mr. Whitmore's allocation is reduced from 18% to 9% of the GP's 20% — a 50% reduction in his share of the incentive allocation. This reduction reflects the fundamental shift in investment authority and day-to-day responsibility from Mr. Whitmore to Ms. Sato and Mr. Huang. Notwithstanding the reduction, Mr. Whitmore retains a meaningful carried interest of 9% (equivalent to 1.8% of fund net new profits), which recognizes his role as the Fund's founder, his contributions to building the current portfolio, and his ongoing (if limited) advisory relationship with the Fund.
(ii) Sato Increase. Ms. Sato's allocation increases from 1.5% to 7.0% of the GP's 20% — an increase of 5.5 percentage points. This increase is commensurate with her assumption of primary investment responsibility as Chair of the Investment Committee and Successor Key Person, her broader strategy coverage (equity long/short and event-driven, representing approximately 70% of the Fund's gross exposure), and her seniority as the Fund's Deputy CIO since inception.
(iii) Huang Increase. Mr. Huang's allocation increases from 0.5% to 4.0% of the GP's 20% — an increase of 3.5 percentage points. This increase reflects his assumption of Successor Key Person status and his continued leadership of the credit relative value portfolio, while recognizing that his strategy coverage is narrower than Ms. Sato's and that his tenure at the Fund is shorter.
(iv) GP-Level Total Unchanged. The total GP-level incentive allocation remains at 20% of net new profits above the high-water mark, subject to the 6% hurdle rate with full catch-up. No change is made to the overall fee structure experienced by the limited partners.
The proposed reallocation is designed to align economic incentives with governance responsibility while preserving a fair recognition of Mr. Whitmore's historical contributions. The differential between Ms. Sato's increase (to 7%) and Mr. Huang's increase (to 4%) is intentional and reflects their respective roles and seniority: Ms. Sato, as Chair of the Investment Committee and the more senior investment professional, bears the greater share of governance and investment responsibility and is compensated accordingly.
C. Whitmore Carry Vesting Schedule
To balance recognition of Mr. Whitmore's historical contributions with the need to incentivize his continued (if limited) advisory involvement and to provide LP comfort regarding the allocation of Fund economics, we recommend that Mr. Whitmore's reduced 9% carried interest allocation vest on a modified schedule, as follows:
• Immediate Vesting — 50%. Fifty percent (50%) of Mr. Whitmore's 9% allocation — i.e., 4.5% of the GP's 20% — vests immediately upon the effectiveness of the LPA Amendment. This immediate vesting recognizes Mr. Whitmore's more than seven years of contribution to the Fund since its inception in March 2017, his role in building the current portfolio, and the value of the intellectual capital and investment framework he has established.
• Ratable Vesting — 50% over 36 Months. The remaining fifty percent (50%) of Mr. Whitmore's 9% allocation — i.e., 4.5% of the GP's 20% — vests ratably over thirty-six (36) months from the date of the Key Person Event (June 10, 2024), at a rate of approximately 0.125% per month. This ratable vesting schedule is designed to incentivize Mr. Whitmore's continued association with the Fund as Senior Advisor and to provide a gradual transition of economics that reflects the ongoing (if diminishing) value of his institutional knowledge and advisory contributions.
• Forfeiture Provision. If Mr. Whitmore voluntarily terminates his Senior Advisor relationship with the Fund before the completion of the 36-month vesting period, any unvested carry is forfeited and redistributed to Ms. Sato and Mr. Huang on a pro rata basis in accordance with their respective allocations (i.e., Sato 7/11ths and Huang 4/11ths of the forfeited amount). The forfeiture provision does not apply to terminations resulting from death or permanent disability.
The vesting schedule is structured to provide LPs with comfort that Mr. Whitmore's economics are partially contingent on his ongoing association with the Fund, while simultaneously recognizing that his historical contributions have already generated substantial value for the partnership. The forfeiture provision aligns incentives by ensuring that Mr. Whitmore does not receive the full benefit of his carried interest allocation if he voluntarily disengages from the Fund before the vesting period concludes.
D. LP-Level Impact
It is important to emphasize that the proposed carry reallocation has no impact on the Fund's overall fee structure as experienced by the limited partners. The management fee remains at 2.0% of NAV per annum, the incentive allocation remains at 20% of net new profits above the high-water mark, the hurdle rate remains at 6% annualized with full catch-up, and the high-water mark mechanism is unchanged. The carry reallocation is entirely an intra-GP matter — it affects how the 20% incentive allocation is divided among the GP's principals, not the total amount of incentive allocation charged to the Fund.
Notwithstanding the intra-GP nature of the reallocation, we recommend full disclosure of the revised allocation to all limited partners as part of the Successor Proposal letter accompanying the LPA Amendment. Transparency regarding the reallocation is important for several reasons: (i) it demonstrates good faith on the part of the GP; (ii) it may be a factor in LP consent decisions, as some LPs may wish to assess whether the reallocation appropriately incentivizes the Successor Key Persons; and (iii) it preempts potential concerns that the reallocation was effected without LP knowledge or input.
The reallocation will be reflected in an amended Schedule A to the A&R LPA, which will be attached to the First Amendment as an exhibit. We note that some LPs may request additional detail regarding the vesting schedule and forfeiture provisions; these details can be addressed in the Successor Proposal letter or in supplemental LP communications.
VIII. Delaware Fiduciary Duty Considerations
A. GP Fiduciary Duties Under Delaware Law
As noted above, the A&R LPA is governed by the laws of the State of Delaware. Under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. ("DRULPA"), the general partner of a Delaware limited partnership owes fiduciary duties to the limited partners, including the duties of care and loyalty, unless such duties are modified, limited, or eliminated by the partnership agreement to the extent permitted by DRULPA § 17-1101(d). The A&R LPA does not contain an express elimination of fiduciary duties, although it does include a standard exculpation provision (Section 7.07) that limits the GP's liability to acts or omissions constituting gross negligence, willful misconduct, or fraud. Accordingly, the traditional fiduciary duties of care and loyalty apply to DCM's conduct in proposing the successor governance framework and carry reallocation, subject to the contractual limitations on liability in Section 7.07.
The consent mechanism in Section 8.04(c) — requiring LP approval by at least 66⅔% of aggregate LP capital commitments for any Successor Key Person designation — provides an important procedural protection for the limited partners. By subjecting the successor governance framework to LP consent, the A&R LPA ensures that the limited partners have a direct voice in what is, fundamentally, a decision about the stewardship of their capital. This consent mechanism does not eliminate DCM's fiduciary obligations, but it does provide a meaningful procedural safeguard that supplements those obligations.
The GP must act in good faith in proposing the Successor Key Persons and structuring the governance framework. Good faith, in this context, requires that the GP's recommendations be based on a genuine assessment of the qualifications and capabilities of the proposed successors, rather than on self-interested considerations such as the maximization of the GP principals' individual economics.
B. Duty of Care in Successor Selection
The duty of care requires DCM to exercise the degree of care that a reasonably prudent person would exercise in similar circumstances in selecting the proposed Successor Key Persons. This duty is satisfied where the GP has conducted a reasonable investigation of the candidates' qualifications and has a rational basis for its recommendation.
In this case, the qualifications of both Ms. Sato and Mr. Huang are well documented and have been observed firsthand by the LP base over a period of years. Ms. Sato's 19-year track record in multi-strategy investing, her role as co-manager of the Fund's investment process since inception, and her existing status as a Managing Member of DCM provide a strong foundation for her designation as a Successor Key Person. Similarly, Mr. Huang's 16-year career in credit markets, his specialized expertise in credit relative value, and his five-year tenure at Driftwood support a reasonable basis for his inclusion in the joint designation. The proposed Investment Committee structure, with its IAC-designated independent member, provides additional governance safeguards that further support the reasonableness of DCM's recommendation.
We are not aware of any viable alternative candidates — either internal to DCM or available externally within the relevant timeframe — who would present a stronger case for Successor Key Person designation. The Fund's strategy verticals require deep domain expertise and institutional familiarity that cannot be readily acquired by an external hire during the 90-day Cure Period.
C. Duty of Loyalty and Carry Reallocation
The duty of loyalty requires the GP to act in the best interests of the partnership and its limited partners, and to refrain from self-dealing or preferring its own interests at the expense of the limited partners. The proposed carry reallocation inherently involves self-interest on the part of two individuals who are both GP principals and proposed Successor Key Persons:
• Ms. Sato, as the proposed Successor Key Person with the largest carry increase (from 1.5% to 7.0% of the GP's 20%), stands to benefit significantly from the reallocation. Her dual role as a 10% Managing Member of DCM — the entity proposing the amendment — and the proposed primary Successor Key Person creates a potential conflict of interest that must be carefully managed and disclosed.
• Mr. Huang similarly benefits from a substantial carry increase (from 0.5% to 4.0% of the GP's 20%), though his conflict is somewhat less acute given his smaller ownership stake in the GP entity.
Several factors mitigate these potential conflicts and support the conclusion that the carry reallocation is consistent with DCM's fiduciary obligations:
(i) Full Disclosure. The carry reallocation will be fully disclosed to all 47 limited partners as part of the Successor Proposal letter and the LPA Amendment. No aspect of the reallocation will be concealed or minimized.
(ii) LP Consent Mechanism. The LPA Amendment, including the revised carry allocations reflected in the amended Schedule A, requires the affirmative consent of limited partners holding at least 66⅔% of aggregate LP capital commitments. This supermajority consent threshold provides robust procedural protection against self-dealing.
(iii) IAC Review. The IAC will review and discuss the proposed carry reallocation at its scheduled meeting on July 29, 2024, providing an additional layer of investor oversight.
(iv) Unchanged GP-Level Total. The total GP-level incentive allocation remains at 20%, meaning that the limited partners bear no additional cost as a result of the reallocation. The reallocation affects only how the 20% is divided among the GP's principals.
(v) Independent Counsel. The IAC has retained independent counsel — Wexford Crane & Albright LLP, represented by Helen M. Calloway, Partner, and David Pineda, Senior Associate — to review the proposed LPA Amendment on behalf of the IAC. This independent review provides an additional safeguard against self-dealing and ensures that the IAC's assessment of the amendment is informed by independent legal advice.
In light of these mitigating factors, we believe the proposed carry reallocation is defensible under Delaware fiduciary duty principles.