Redemption gates and suspension in a wholesale fund.

The redemption window is set by the realisation profile of the assets, and the discipline is to draft backwards from that profile rather than forwards from what investors asked for during the raise. A private credit book with a weighted average maturity measured in years cannot fund a monthly window out of loan repayments. It can fund one out of a cash buffer, which is capital held at a low return, or out of new subscriptions, which makes paying exiting investors a function of continued fundraising.

Three separate dates do the work, and a deed that conflates any two creates an argument that surfaces in the first difficult window. The request cut-off closes the window, the pricing date fixes the dollars per unit, and the payment date is when money moves. The pricing date has to sit after the cut-off, because pricing off the last published net asset value lets a redeeming investor exit on a valuation struck before the trustee knew what it knows when the request lands. The payment date should follow realisation or carry an express extension right, because fixing payment a set number of days after pricing commits the trustee to a timetable the assets may never meet.

Lock-ups decide how long that machinery stays switched off, and how the period is measured matters as much as how long it runs. A hard lock prevents redemption for a stated period, and a soft lock permits an earlier exit at a discount or with a fee retained for the fund rather than the manager. Where the lock runs from the fund's first close, an investor who subscribed at the third close gets a materially shorter effective lock than one who backed the fund at the first. Running it from each investor's own subscription date removes that, at the cost of tracking a separate unlock date for every holding.

A gate caps how much can leave in one window, and the two common designs do different jobs. A fund-level gate caps aggregate redemptions at a stated proportion of net asset value, which protects the portfolio because it limits total outflow regardless of how many investors ask. An investor-level gate caps how much of a single holding can be redeemed at once, which is simpler to administer and does nothing against a correlated run, because every investor redeeming their permitted share in the same window can still drain the fund.

Once a gate binds, requests above it are scaled back pro rata, and the deed has to decide what happens to the unsatisfied balance. If it lapses, the investor lodges again next window. If it carries forward with priority, the investor who asked first is treated consistently, but a queue forms, and a queue holding priority claims over the next window makes that window more likely to gate as well. A deed that settles neither rule leaves the trustee to choose during the crisis that raised the question, and whichever way it chooses will read as a preference for one group of unitholders.

Suspension stops processing altogether, and in an unregistered wholesale trust that power exists only if the deed created it. There is no statutory power to suspend a trust of this kind, and no regulator grants, supervises or lifts one. A trustee holding requests it cannot fund under a deed with no suspension power is choosing between an obligation it has no capacity to meet and a breach of the instrument that governs it. A power granted in a single sentence is only marginally better, because it leaves the trustee to settle the mechanics while the event is running.

Once a request has been accepted and priced, the redeeming unitholder may have ceased to be a unitholder and become a creditor of the trust for the redemption amount, ranking ahead of those who remain. Whether that conversion happens, and at what point, is a drafting question, and it decides whether the investors who stayed absorb the whole of any later fall in value. A suspension clause should settle each of the following on its face.

The comparison matters to any sponsor who may register the scheme later, because the Act answers the redemption question by reference to the portfolio rather than the drafter. A registered scheme's constitution does not have to give members a withdrawal right at all. Where it does, section 601GA requires the constitution to specify the right and to set out adequate procedures for making and dealing with withdrawal requests, and those procedures must be fair to all members. Where the right may be exercised while the scheme is not liquid, the constitution has to provide for it to be exercised in accordance with Part 5C.6.

Chapter 5C divides schemes into liquid and non-liquid on a factual test rather than a label the responsible entity chooses. A scheme is liquid where liquid assets account for at least 80 per cent of the value of scheme property. Liquid assets are money on deposit with a bank, bank accepted bills, marketable securities, and other property the responsible entity can reasonably expect to realise for its market value within the period the constitution allows for satisfying withdrawal requests. A scheme can drift across that line as its portfolio changes without anyone deciding to move it.

While the scheme is liquid, members withdraw under the constitution. When it is not, Part 5C.6 takes over: a member can then withdraw only in response to a withdrawal offer the responsible entity chooses to make, to all members or to all members of a class, and only to the extent identified assets can be converted to money in time. The offer must specify those assets, the money expected to be available once they are converted, and the method for dealing with requests if that money will not cover them all. It must stay open at least 21 days, a copy must be lodged with ASIC, and only one withdrawal offer may be open at a time. Nothing is paid while the offer is open, requests are met proportionately after it closes where the money falls short, and the Act allows the responsible entity to cancel an offer before it closes.

Where a responsible entity has suspended withdrawals and stopped issuing new interests, the ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 allows limited withdrawals to members in defined hardship. It works on two limbs: an exemption from the equal treatment duty in section 601FC(1)(d) to the extent that duty would otherwise block a hardship payment, and a declaration that Chapter 5C applies as if scheme constitutions and the withdrawal provisions were modified to permit one. The grounds are defined, the relief is conditional, and the instrument is presently drafted to repeal itself at the end of February 2027. It exists because a responsible entity cannot prefer one member over another without a power to do so, and no equivalent exists for an unregistered wholesale trust. Where the deed contains no hardship carve-out there is nowhere to apply for one, and a trustee paying a distressed unitholder ahead of the rest has preferred one beneficiary over the others. That unitholder also has no route to the Australian Financial Complaints Authority, because the external dispute resolution obligation attaches to services provided to retail clients, so a disputed suspension is a matter for the deed and the courts.

A redemption pays out a share of the fund at a price struck from the net asset value, so every redemption is a valuation event whether or not the trustee treats it as one. Where the carrying value sits above what the assets are worth, the redeeming investor is paid too much and the excess comes out of property belonging to the investors who stayed. In an illiquid book that case recurs, because impairment is recognised on a reporting cycle while the deterioration causing it happens continuously. A responsible entity must treat members of the same class equally and members of different classes fairly, and must ensure scheme property is valued at regular intervals appropriate to the nature of the property. A trustee of an unregistered trust carries the general law duty to act impartially between beneficiaries. Paying an exiting unitholder on a valuation the trustee already has reason to think is behind events is difficult to reconcile with either.

The workable discipline is to attach a valuation decision to the redemption rather than to the reporting calendar. Between the last valuation and the pricing date, ask whether anything has happened that a buyer of the asset would care about: a borrower missing a payment, a covenant breach waived, an anchor tenant failing, an indicative bid well below carrying value. Where the answer is yes, the trustee decides whether the carrying value still holds before striking a price, and records the decision either way. Where the deed lets the manager set the redemption price over a portfolio it earns a fee on, that conflict operates at the exact point money leaves the fund, and the deed should say who can override the number.

Two further amounts leave with a redeeming investor unless the deed deals with them. The first is their share of trust income for the part of the year they were in the fund, and a deed silent on how income is attributed on a mid-year redemption leaves the trustee to answer that question at the same time it strikes a price. The second is their share of liabilities the fund has accrued but not paid, including expenses and any amount the trustee may itself be assessed for. Where the deed permits a holdback against redemption proceeds until the position for the year is determined, the trustee can pay the bulk and settle the balance later; where it does not, the shortfall is carried by the investors who stayed.

Anti-dilution tools have to be in the deed before they are needed. A redemption fee retained for the fund rather than the manager, a spread between application and redemption prices reflecting the real cost of realising assets, or an express levy on large redemptions each push the transaction cost of an exit onto the investor causing it. ASIC and APRA publish a joint guide to good practice in unit pricing, Regulatory Guide 94. It is written for regulated product issuers, and a wholesale trustee whose practice departs from it should be able to say why. It expects a pricing policy documented in advance, tolerances that fix when a pricing difference becomes an error, and rectification and compensation procedures settled before an error rather than assembled during one.

A side pocket moves an impaired asset, or one the trustee cannot reliably value, into its own class of units, so ongoing redemptions price against the remaining portfolio while the segregated exposure is realised and distributed as it converts to cash. It depends on the deed already having a class structure, or on the trustee holding power to amend the deed to create one, and that power is rarely unlimited. An amendment changing the rights of existing unitholders usually needs approval at whatever majority the deed specifies, which is difficult to obtain from investors just told an asset cannot be valued. For a registered scheme, section 601GC sets the equivalent test: the responsible entity may modify the constitution alone where it reasonably considers the change will not adversely affect members' rights, and otherwise needs a special resolution.

Performance fees have to be dealt with expressly, because a fee calculated on a side pocketed asset before it is realised is a fee charged on a number nobody was able to strike. The workable answer is to stop accrual on the segregated class and crystallise the fee, if at all, on realisation. The high water mark needs the same treatment, defined for each class separately, or the segregated units carry a mark struck against a portfolio they are no longer part of.

An in specie redemption satisfies a request by transferring the underlying asset instead of cash. It suits a divisible and transferable holding going to an investor able to hold it. The transfer is a disposal at the trust level with its own tax consequences, transfer duty can apply where the asset is dutiable property in the relevant jurisdiction, and the receiving investor takes on something with no ready market. In a private credit fund, transferring a participation usually needs consent under the facility documentation, from the agent or the borrower, which puts a third party in control of whether the redemption can be satisfied at all.

The gap between what the deed says about redemption and what investors believe they were promised opens during the raise and is rarely closed afterwards. An information memorandum describing the gate and the suspension power with the specificity it gives the fee schedule, including a worked example of a window scaled back pro rata, closes most of it at no cost to the raise.

A preferential redemption right granted in a side letter is the term most likely to cause trouble in a stressed window, because honouring an exit ahead of the queue means paying one beneficiary at the direct expense of others under a document they have never seen. Where the deed permits one at all, the gate provision should say so on its face, and the trustee should be able to point to the deed rather than to a letter when it applies the gate.

A suspension notice should name the provision of the deed the trustee is acting under, reach every unitholder at the same time, and say the same thing to each of them, because a trustee that briefs its largest investor separately has handed one beneficiary better information about a decision that binds them all. Anything the trustee cannot state yet should carry a date by which it will. The questions worth putting to a fund lawyer before the deed is signed are narrow.