Valuation and Side Pockets

A side pocket is a segregated account within the fund that holds designated illiquid positions. Investors who are in the fund when a position is side-pocketed receive a pro-rata interest in that pocket; investors who join later do not. The pocket is valued separately, cannot be redeemed until the position is realized, and its result is allocated to the investors who bore its risk.

Side-pocketed positions are valued under a written policy reviewed by the fund’s auditor. Positions with no observable market are held at cost unless a subsequent financing, a material change in the business or an impairment justifies a change. Locked tokens with a liquid unlocked market are valued from that market with a discount reflecting the lock-up and the fund’s ability to hedge. Valuations are reviewed by the administrator and the auditor.

Performance fees on side-pocketed positions are charged only on realization, when the gain is actual rather than estimated. Management fees on side pockets are charged on cost or on a written valuation basis described in the offering documents. This aligns the manager’s compensation with realized outcomes and removes the incentive to mark illiquid positions generously.

A position leaves the side pocket when it becomes liquid (on unlock, on listing, on acquisition) or is written off. On realization, the pocket’s value is distributed or transferred into the liquid fund for the investors entitled to it. Where a position becomes partly liquid, the liquid portion can be hedged or sold under the venture book’s policy while the locked portion remains.