Oct. 15, 2019

Evolution of LPACs: Grappling With GP and LPAC‑Member Conflicts of Interest While Avoiding Liability (Part Two of Two)

Limited partner (LP) advisory committees (LPACs) were developed to, among other things, serve as a check on procedural miscues at the fund level and review conflicts of interest presented by general partners (GPs). As the PE industry has matured and become more complex, however, LPACs themselves are becoming subject to procedural scrutiny, structural changes and conflict-of-interest concerns that are consuming more time and attention of LPs and GPs. To better understand these changes, the Private Equity Law Report interviewed Paul Weiss partner Amran Hussein about the recent evolution of LPACs and the types of issues they are facing. This second article in a two-part series explains how increasingly complex PE strategies are presenting unique issues for LPACs to approve, as well as how the information divide can be bridged between LPAC members and non-member LPs. The first article provided an overview of various procedural changes that have been adopted for managing LPAC efforts, including mechanisms favored by GPs to keep LPAC members accountable. For more on LPACs, see “Current Scope of PE‑Specific Side Letter Provisions: Co‑Investment Rights, LP Advisory Committee Seats and Parallel Funds/AIVs (Part Two of Three)” (Mar. 26, 2019); and “Proper Use of Advisory Committees by Private Fund Managers May Mitigate Conflicts of Interest” (Dec. 17, 2015).

Implications for Investment Managers of the New E.U. Investment Firm Prudential Regime

The European Parliament recently voted to adopt the text agreed by the European Commission, the European Parliament and the Council of the E.U. on a new legislative package revising the prudential framework for E.U. investment firms. Investment managers based in the E.U. will need to consider this new legislative package given its implications for the level of regulatory capital that managers would be required to hold, as well as its restrictions on how managers pay their employees and the remuneration disclosures that would be required. In a guest article, Leonard Ng and Chris Poon, partner and senior associate, respectively, at Sidley Austin, explore the implications of the legislative overhaul of the prudential framework for E.U. investment firms and managers. See also “The U.K. Senior Managers Regime: Prescribed Responsibilities, Statements of Responsibilities, ‘Fit and Proper’ Determinations and Staff Certification” (Aug. 6, 2019). For additional insight from Ng, see “E.U. Market Abuse Scenarios Fund Managers Must Consider” (Dec. 17, 2015).

On‑Site ODD: Tips for Ensuring an Efficient Visit and Meeting With Critical Manager Personnel (Part Two of Three)

The on-site visit has become an essential element of an investor’s operational due diligence (ODD) program. As one allocator told the Private Equity Law Report, “There are a few important questions that can only be asked while looking into the eyes of the chief operating officer or chief financial officer.” There are, however, various questions, practices, approaches and techniques investors can implement to extract maximum value from an on-site visit. This three-part series details how and why investors should supplement their remote diligence of fund managers with on-site due diligence visits. Based on insights from ODD veterans, this second article analyzes how investors should conduct diligence visits and how managers can prepare for them effectively. The first article outlined the rationale for the on-site visit and the mechanics of advance preparation. The third article will enumerate steps for investors to take to memorialize and supplement their diligence efforts after the on-site visit. See “Perspectives on Operational Due Diligence From an Investor, Consultant and Manager” (Nov. 9, 2017); and “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Fund Managers” (Apr. 18, 2014).

Impact of the Tax Cuts and Jobs Act: Treatment of Carried Interest and the Business Interest Deduction Limitation (Part One of Two)

The Tax Cuts and Jobs Act of 2017 (Tax Act) effected a substantial overhaul of the U.S. tax code, incorporating many new provisions that have a material impact on private fund managers and their investors. Although the Tax Act was introduced a while ago, its implementation has raised a number of questions and issues among PE industry participants. A recent Practising Law Institute seminar featuring Jonathan A. Goldstein, partner at Simpson Thacher, and Sara B. Zablotney, partner at Kirkland & Ellis, took a deep dive into the provisions of the Tax Act, ways they have affected the PE industry to date and potential issues going forward. This first article in a two-part series describes the portions of the program pertaining to changes to the taxation of carried interest, withholdings when non-U.S. persons transfer partnership interests and limitations on the deduction of business interest. The second article will explore the deduction for pass-through business income; anti-hybrid and base erosion rules; the taxation of cross-border investments; foreign credit support; and the conversion of public PE partnerships to corporations. See “Planning Strategies for Private Fund Managers Under the Tax Cuts and Jobs Act” (Jun. 7, 2018); and “How the Tax Cuts and Jobs Act Will Affect Private Fund Managers and Investors” (Feb. 22, 2018).

ACA Program Examines Sponsor‑Led Secondary Market: Keys to Success, Process and Compliance (Part Two of Two)

ACA Compliance Group (ACA) recently dissected the growth of the sponsor-led secondary market, as well as the key issues impacting how sponsors can successfully complete those deals. The program featured Brian Mooney, managing director of Greenhill & Co., Inc, and Jami Jack, director of ACA. This article, the second in a two-part series, analyzes key success factors; the process and timeline of secondary transactions; and compliance considerations. The first article summarized the panelists’ thoughts on secondary market themes and outlook; issues addressed by sponsor-led transactions; and specific solutions that sponsor-led secondary transactions can offer to PE sponsors. For additional commentary from ACA, see our two-part series on pay to play rules: “Federal Rules” (Feb. 14, 2019); and “State and Local Rules; Traps for the Unwary; and Compliance” (Feb. 21, 2019).

Corey Zarse Is Newest Member of Jones Day’s PE Practice

Jones Day announced that Corey Zarse has joined the firm’s PE practice as a partner in its Chicago office. Zarse represents private investment funds, investment advisers, investment companies and broker-dealers on matters relating to regulatory and compliance issues; mergers and acquisitions; and joint ventures. For commentary from another Jones Day partner, see our two‑part series: “Understanding the CFIUS Review Process and How to Structure Investments to Minimize Regulatory Risk” (Apr. 2, 2019); and “FIRRMA Expands the Scope of Transactions Subject to CFIUS and Lengthens the Target Acquisition Timeline” (Apr. 9, 2019).