Jan. 25, 2022

Notable U.S. Tax Developments Affecting PE Sponsors, Including Potential Rebirth of Significant BBBA Provisions in 2022 (Part One of Two)

Despite much hoopla and anticipation, 2021 ended without President Biden’s signature legislation – the Build Back Better Act (BBBA) – obtaining congressional approval. For better or worse, that also meant a number of tax reforms that would have materially impacted the U.S. private funds industry were tabled, although many are expected to be reintroduced in future tax legislation. 2021 still introduced a number of tax-related changes in the U.S. that are likely to reverberate throughout 2022, making it all the more necessary that PE sponsors keep their proverbial fingers on the pulse of matters. In this first article in a two-part series, the Private Equity Law Report interviewed Proskauer partner Amanda H. Nussbaum on relevant tax provisions from the BBBA that could be reintroduced in 2022, as well as the ongoing impact of the final regulations on carried interest and IRS audit activities. The second article will include Nussbaum’s observations on relevant employment-related 2021 tax developments in the U.S., as well as insights from Proskauer partner Stephen Pevsner on the U.K. government’s decision not to increase capital gains tax rates – including as they apply to carried interest – and its introduction of the new U.K. asset holding company regime. See “Hot Tax Topics for Private Fund Investors and Managers” (Mar. 2, 2021); and “EY Partner Outlines Significant PE Tax Trends and Effect of Recent Reforms” (May 5, 2020).

Conflicts of Interest Questionnaires: Why Fund Managers Need Them, and What They Should Cover (Part One of Two)

A conflict of interest occurs when an individual or a firm has an incentive to serve one interest at the expense of another interest or obligation. The source of those conflicts is often an investment adviser’s own employees. For example, if an employee’s close relative owns a company in which the adviser invests client funds, it could create a conflict of interest. Investment advisers owe a fiduciary duty to their clients that obligates them to either eliminate any conflicts of interest or to mitigate and disclose them. To fulfill that duty, advisers must know about any existing or potential conflicts of interest created by employees’ outside business activities or relationships. Advisers can use conflicts of interest questionnaires to gather information from employees on common situations and relationships that may give rise to a conflict. This two-part series details the fundamentals of conflicts of interest questionnaires. This first article explains why investment advisers should use conflicts of interest questionnaires and describes the areas the questionnaires should cover. The second article will outline how to use conflicts questionnaires, including who should be required to complete them, when they should be completed and how advisers should use the information gathered on these forms. See “OCIE Risk Alert on Private Funds: Focus on Conflicts; Fees and Expenses; and MNPI (Part One of Two)” (Aug. 25, 2020); and “Navigating the SEC’s Interpretation Regarding an Investment Adviser’s Standard of Conduct: Three Tools to Systematically Monitor Conflicts of Interest (Part Three of Three)” (Dec. 17, 2019).

Liquidity Solutions Pursued by Sponsors in a Harried Fundraising and Deal Environment (Part One of Two)

Fundraising cycles for PE funds have shortened significantly over the past couple of years as sponsors have scrambled to stay competitive in the frothy deal market and provide financial support to their existing portfolio companies. In situations in which fundraising comes up short, sponsors have creatively pursued alternative avenues to bridge funding gaps. Some of those solutions are conveniently internal (e.g., spreading funding across multiple funds; amending fund documents to free up additional liquidity; etc.), while others involve looking for support from third-party opportunity funds. Those trends were addressed at a recent panel at Proskauer’s Private Funds Annual Review Conference that featured Proskauer partners Camille Higonnet, Edward Lee, Nicholas C. Noon and Brian S. Schwartz. This first article in a two-part series analyzes recent PE fundraising trends and the relative merits of the alternative approaches sponsors have pursued to satisfy their liquidity needs. The second article will examine some PE fund terms that have been at the forefront of negotiations between GPs and LPs, including with respect to fees and expenses; fundraising extensions; and recycling opportunities. For additional commentary from Proskauer attorneys, see our two-part series: “Evolving PE Fund Management Techniques and Considerations During a Financial Crisis” (May 19, 2020); and “Impact of Economic Uncertainty on PE Fundraising and Fund Formation Efforts” (May 26, 2020).

Exams of Non‑U.S. Advisers: U.S. Versus Non‑U.S. Exams and SEC Versus Foreign Regulator Exams (Part Two of Three)

According to the SEC’s Division of Examinations (Examinations) 2021 Examination Priorities, there are now more than 900 offshore registered investment advisers, managing nearly $12 trillion in investor assets. Given that many of those non‑U.S. advisers manage private funds, such as PE and hedge funds, and Examinations’ continuing focus on advisers to private funds, it is unsurprising that the SEC appears to have stepped up its efforts to conduct examinations of non‑U.S. advisers to private funds. This second article in a three-part series compares SEC exams of U.S. advisers to exams of non‑U.S. advisers, as well as exams conducted by the SEC to those conducted by foreign regulators. The third article will provide practical tips for non‑U.S. advisers that may face an SEC exam for the first time. The first article discussed the SEC’s authority to conduct examinations of non‑U.S. advisers and the recent trend of more exams of those advisers. See “Recent Speeches Outline the Ethos, Direction and Priorities of the SEC’s Division of Enforcement Under Gurbir Grewal” (Nov. 16, 2021); and “SEC Division of Examinations’ 2021 Priorities Track and Advance 2020 Priorities” (Apr. 27, 2021).

Amount of Value Outsourced Fund Administrators Confer to PE Sponsors and Criteria for Selecting Them

Outsourcing fund administration is common practice for hedge funds, but PE funds have tended to keep the administration function in house. As PE firms launch more funds and diversify their platforms into new asset types and strategies, however, the potential benefits of engaging a third-party fund administrator may become more compelling. That topic was addressed by a recent panel at the SS&C Intralinks Global Virtual Summit 2021, which was moderated by Phil Chu, director at SS&C Technologies (SS&C) and featured Philip Hu, managing director at Primavera Capital Group; Ken Lin, associate director, Invesco Asset Management; and Andrew Tong, group CEO, Original Financial Group Limited. Specifically, the panel examined key factors for firms that are considering outsourcing their fund administration services, criteria to take into account when selecting a fund administrator and some of the potential advantages of outsourcing fund administration. This article summarizes the relevant takeaways and insights from the panel. For additional commentary from SS&C, see “Emerging Trends in LP Demands for Standardized ESG Reporting and How GPs Have Attempted to Comply” (Jul. 20, 2021); and “LPs Are Increasingly Frustrated by GPs’ Outdated Technology and Non-Standardized Reporting” (Dec. 15, 2020).